“As bulk of these fund flows were driven by short-term arbitrage that capitalised on the non-deliverable forwards (NDF) market, a recurrence would be unlikely,” it said in a statement issued on Tuesday.
The FMC pointed out the NR holdings in the bond market have gradually been declining from a peak at 34.7% in 2016 and declining to 28.7% at end-February 2017.
“The sell-down was largely from shorter term papers which are mainly attributed to unwinding of NDF positions by NR financial institution investors,” it said in a statement issued following a Roundtable Discussion on the Domestic Bond Market Development on March 10, 2017 at Sasana Kijang.
The decline followed the Nov 8 US presidential elections and post NDF measures implemented by Bank Negara Malaysia (BNM).
NR holdings of less than three years maturity reduced by RM15.2bil from November 2016 to-date, comprising 70% of the reduction in NR holdings of government bonds.
BNM shared that further granular data showed that, of these short term papers, the bulk of the reduction in NR holdings was in less than one-year maturities.
“This type of short-term flows has been destabilizing particularly when it reacts 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 the short term NR 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 November 2016,” said the FMC.
It said the purpose was to assess the market developments with an update and discuss initiatives to further develop the bond market. The session was chaired by BNM's assistant governor and FMC chairman Adnan Zaylani Mohamad Zahid.
Issues discussed issues relating to the readjustment of portfolios by NR fund managers pursuant to the recent US presidential elections and the implementation of non-deliverable forward (NDF) measures by BNM.
The Roundtable also discussed whether such investors or flows would return to the Malaysia’s bond market.
“Given that the bulk of these fund flows were driven by short-term arbitrage that capitalized on the NDF market, a recurrence would be unlikely. In the future, the level of participation of NR investors could thus settle at a lower but more stable level,” it said.
Corporate bond issuances
The FMC said the Roundtable also discussed the prospects of corporate bond issuances in Malaysia.
“Corporate issuers had stayed away from the bond market towards the end of last year due to the uncertainty surrounding the overall financial market. Corporate bond yields have since stabilised.
“In the period Jan-March 2017, the corporate bond market was more conducive for issuers with RM8bil raised and a number of corporate issuers are in the pipeline to access the market in 2017,” said the FMC.
The Roundtable also discussed the need to develop the Credit Default Swap (CDS) and Interest Rate Swap (IRS) market and alternative price reference mechanisms to facilitate both issuers and investors in the price discovery process.
“Continued participation and commitment by lead managers after the conclusion of issuances will also add vibrancy to the secondary corporate bond market.
“The Roundtable also deliberated on issues surrounding demand for unrated and lower rated bonds. An idea put forward was for the need of special purpose funds that invest in this space.
“The Roundtable also examined the use of repos as an alternative liquidity management tool and funding instrument for financial institutions. The annual trading volume has been growing since Bank Negara Malaysia liberalised short-selling and reverse repo operations in 2015.
“The trading volume of repos averaged RM195bil per annum since 2012. The Roundtable highlighted the need to review existing regulatory frameworks to allow more diverse participants in the repo market,” it said.
Improving market liquidity
The Roundtable also deliberated on improving market liquidity by introducing more hedging instruments.
This included further expansion of the short selling framework as well as increasing participation in the repo, bond swap and Interest Rate Swap (IRS) market. The further development of onshore hedging will complement the liquidity in the secondary market, particularly on the longer end of the yield curve.
The participants also discussed the development of bond investment products for retail investors and noted the importance of educating retail investors on the basics of investing in bonds.
The discussion also touched on the need for an enhanced surveillance mechanism to enable more effective macro and micro surveillance of financial markets.
One of the key initiatives is to have financial institutions and investors maintain segregated accounts for their investments which will allow bond transactions and portfolio holdings to be monitored on real time basis. This also would allow more detailed analysis and release of macro or aggregate data on important investment trends to the market.
The participants acknowledged and welcomed the efforts by regulators to provide greater transparency in particular with regard to bond market activities.