KUALA LUMPUR: Foreign funds continued to shy away from Malaysian Government Securities (MGS) and Government Investment Issue (GII) last month, and the situation is likely to extend into August as well, said RAM Rating Services Bhd (RAM Ratings).

Persistently high COVID-19 caseload and political uncertainties continued to erode foreign interest in both instruments in July, the credit rating agency said.

RAM Ratings reported that net foreign pullout accelerated sharply to RM3.6 billion from RM497.1 million in June, much of it from MGS and GII (RM3.2 billion).

"Such subdued foreign participation is expected to continue into August, given the political strife that culminated in the resignation of the sitting government on Aug 16, 2021.

"Uncertainties may linger on until a confidence vote is tabled in the Parliament. As such, foreign participation will likely remain soft in the immediate term," it said in a statement.

Once these uncertainties clear, the agency said, the positive yield differentials over US Treasuries, which averaged around 195 bps for 10-year MGS in August, should support demand for MGS and GII.

"However, demand for longer tenures will be limited by the repositioning of global funds to avoid duration risks in anticipation of policy rate normalisation by the US Federal Reserve and European Central Bank," it said.

Ramped-up vaccinations, leading to a more tangible path of economic recovery in 2021's final quarter and 2022, should also help buoy sentiments for Malaysian securities later in the year, it added.

-- BERNAMA