Strong foreign bond-buying continues

Strong foreign bond-buying continues

For the eighth consecutive month, the local bond market continued to see net positive foreign inflows in December. This was despite the Fitch downgrade of Malaysia's sovereign credit rating against the pandemic backdrop, and a strong indication that investors were buying into November's dip.With net foreign inflows coming in at RM3.6 billion (November: RM2.5 billion), total foreign holdings rose to RM223.0 billion, the highest since November 2016. This took the total foreign share of outstanding local bonds to 13.9% (November: 13.6%).Malaysian Government Securities (MGS) and Government Investment Issues (GII) were the primary drivers of December's net foreign inflows. Foreign holdings of MGS rose by RM2.4 billion to RM177.3 billion, which is equivalent to 41.1% of total outstanding MGS. Meanwhile, foreign holdings of GII increased by RM1.4 billion to RM24.8 billion, representing 6.6% of total outstanding GII.Foreign demand for MGS in December was mainly driven by yield-hunting activities given that Malaysia had remained in deflationary territory and the US Federal Reserve's pledge to keep rates near zero at least through 2023. Demand for MGS was also supported by the broad weakness of the US dollar against the backdrop of improving global risk sentiment, which was boosted by the fresh USD900 billion