Some foreigners may exit local bond market, no major sell-off seen

However, this (foreign exit from the bond market) would, perhaps, be a temporary phenomenon given that the country

PETALING JAYA: Some foreigners could possibly exit the Malaysian bond market this week where some RM11bil worth of Malaysian Government Securities (MGS) are due to mature, no thanks to the weakening ringgit.

However, this would, perhaps, be a temporary phenomenon given that the country’s fundamentals remained intact, said OCBC Bank (M) Bhd head of global treasury Ng Seow Pang.

“We anticipate some will exit due to the strict parameters within which their investment mandate will have to operate,” he told StarBiz.

Ng said the state of the global markets was not helping either, as generally, investors were looking to exit emerging markets.

“The US Federal Reserve has reiterated that a rate hike will remain on the table until the end of this year. This could provide an additional reason to exit,” he said.

A combination of the falling ringgit, which is down some 26% against the greenback so far this year, political uncertainties and external weakness have had a negative impact on investors of the Malaysian bond market since the beginning of this year, especially those who had not hedged their currency positions.

Foreigners had turned net sellers of MGS in July, around the same time when local political controversies picked up pace, liquidating more than RM1bil in the value of sovereign notes in that month alone.

The bond market in Malaysia has generally been relatively stable compared with the equity market, which has seen large outflows in recent times, with cumulative net foreign outflow amounting to RM17.7bil year-to-date, already exceeding the RM6.9bil outflow for the whole of last year.

Reuters reported yesterday that RM11bil worth of Government bonds are due to mature today and that foreigners were likely to pull their money out rather than re-invest it in Malaysian debt.

Quoting Singapore-based lead portfolio manager for local currency debt at Neuberger Berman, Prashant Singh, it said the risk-reward of investing in Malaysian assets was “quite unattractive” for now due to the political and currency risks, as well as the high foreign ownership of the bond market.

While huge outflows were unlikely, that did not mean that the risk was not there that some of this money could go out, the newswire quoted Prashant as saying.

“We would not be surprised to see a significant portion of the maturing bonds not being reinvested,” he told Reuters.

Meanwhile, there appears to be support for Malaysian bonds, if the results of an auction of some 15-year RM2bil MGS held yesterday, are anything to go by.

A local bond trader said demand for the papers exceeded the amount on offer by some 2.17 times, indicating that there was still interest, although primarily from domestic investors. “However, the situation remains volatile and fluid, and going by the ringgit’s declining trend, we cannot be sure if the money will be pulled out over the next few days,” he said.

The coupon rate for this 15-year debt programme is 4.498% per annum, which is in tandem with the current scenario of higher inflation. A year ago, the coupon or interest rate paid out to investors was about 4% for the same tenure.

Like Prashant, OCBC’s Ng said at the moment, the risk-reward of investing in Malaysian bonds had become very much less attractive.

However, he pointed out that there was a global phenomenon to reduce exposure to emerging markets in the current environment. “In financial markets, risk appetite is continuously adjusted according to market conditions.”