KUALA LUMPUR (Sept 26): The US Federal Reserve's recent announcement that its balance-sheet normalisation would start in October and its commitment to maintaining the rising cycle for the federal funds rate are expected to dampen the pace of incoming foreign investment funds into the country, said RAM Rating Services Bhd.

In a statement today, the local rating agency said the risk of further outflow of foreign holdings of Malaysian bonds may also heighten amid rather lumpy maturities of government bonds over the next three months, with a cumulative value of RM33.8 billion.

While these will pose some concern, RAM said it believes the extent of market volatility will be curtailed given the current profile of foreign investors.

"About 55% of the foreign investors of Malaysian government bonds are of the 'sticky' type, comprising central banks, governments, pension funds and insurance companies, which are less reactive to sentiment changes than portfolio investors and more responsive to longer-term fundamentals," it noted.

RAM noted that corporate bond issuance rebounded in August, following the low of RM2.8 billion in the preceding month. A total of RM8.7 billion of corporate bonds were issued in August, which brought the year-to-date issuance value to RM66.3 billion — a 10.3% year-on-year increase.

"There was a good mix of bonds from various sectors, with the largest issues from financial services and infrastructure and utilities — the two primary drivers of the Malaysian bond market," it said.

RAM added that the conducive environment for bond financing in August included declining Malaysian Government Securities (MGS) and corporate yields across almost the entire maturity spectrum and bond classes, driven by reignited foreign interest in higher-yielding assets in emerging markets.

"For August, MGS and corporate bonds posted respective foreign inflows of RM2.1 billion and RM563 million. That said, overall foreign holdings ebbed 0.4% month-on-month (or RM745 million), due to a sizeable quantum of maturing government investment issues," it noted.