"The situation was made worse by Donald Trump being elected at the US presidential election which resulted in the strengthening of the US dollar"
PETALING JAYA: Foreigners have sold RM21.71bil worth of government bonds in the last three months, reducing their share of holding in the debt papers to 28.7% as of end February from a peak of 34.7% last year.
According to Bank Negara, 70% of the debt papers that were sold by foreigners have less than three years to mature and the bulk of them will expire in less than a year.
“The selldown was largely due to the unwinding of the NDF (non-deliverable forwards) positions by non-resident financial institution investors,” said Bank Negara’s financial markets committee which released a statement following a roundtable discussion on the domestic bond market development last Friday.
The central bank took measures from Nov 11 last year following a drastic decline in the value of the ringgit to restrict the speculative trading.
The situation was made worse by Donald Trump being elected at the US presidential election which resulted in the strengthening of the US dollar.
The roundtable was organised by the central bank’s financial markets committee and chaired by assistant governor Adnan Zaylani Mohamad Zahid. There were 30 participants comprising domestic and institutional fund managers, sukuk and bond issuers, private and public asset managers, rating agency and treasury heads from financial institutions.
It said participants of the roundtable noted that the selldown was largely due to the unwinding of the NDF positions by non-resident financial institution investors. The central bank took measures following a drastic decline in the value of the ringgit to restrict the speculative trading.
Bank Negara does not expect the foreign funds to be at levels seen previously.
“Given that the bulk of these fund flows was driven by short-term arbitrage that capitalised on the NDF market, a recurrence would be unlikely. In the future, the level of participation of non-resident investors could thus settle at a lower but more stable level,” it said, adding that the short-term flows have been destabilising particularly when reacting to global and regional developments.
“Nevertheless, the participants of the roundtable are of the view that the market is able to withstand and absorb the changes in short-term non-resident holdings.
“This was evidenced by well supported government securities auctions which recorded strong average bid-to-cover ratio of 2.5 times in 2017, which was above the two-year average of 2.3 times. Secondary bond market yields have also recovered about 43% from its peak in Nov 2016,” it said.
The central bank said the local bond market continues to grow with the current outstanding value of RM1.2 trillion or 90% of gross domestic product (GDP) and an average annual growth rate of 10.5% for the past 10 years making the size of the country’s bond market relative to GDP the largest in South-East Asia and the third largest in Asia. This year, there could be a net bond issuance of RM80bil.
Roundtable participants remained positive on the domestic bond market despite it experiencing various episodes of volatility due to newsflows from regional and global financial markets.
“With the presence of domestic investors and active market-making initiatives by a number of principal dealers supported by the Financial Markets Association Malaysia, the secondary market liquidity has improved.
“The spreads between the buying and selling quotes for bonds are now narrower at 20 sen to 50 sen compared with the peak of RM2 during the low liquidity period post US elections,” it said.
Participants also said corporate bond yields have stabilised since the beginning of the year after the uncertainties surrounding the financial markets, with corporate issuers having stayed away from the bond market towards the end of last year.
The corporate bond market was more conducive for issuers from January to March with RM8bil raised and a number of corporate issuers are in the pipeline to access the market in 2017.