Bond selldown to be more gradual


Since November, foreigners have sold RM62.6bil worth of Malaysian bonds

PETALING JAYA: Portfolio adjustments among foreign funds could see a further selldown in Malaysian Government bonds, but this could be more gradual than in recent months.

Foreigners have dumped billions of ringgit worth of Malaysian Government bonds since last November, with the latest selldown in March totalling RM27.5bil, the largest in six years. The selldown has sent foreign holdings of Malaysian Government Securities (MGS) to its lowest level in almost six years, and since November, foreigners have sold RM62.6bil worth of Malaysian bonds.

Maybank Investment Bank Research believes foreigners could be unwinding their holdings in MGS in relation to the reduction in Malaysia’s weight in the Emerging Market Index of the Global Bond Index. It noted that the net sell amount of MGS in March was larger than the MGS maturity of that month.

A currency trader said that while the selldown in the MGS has slowed down for now, investors will be looking for opportunities to dump more of it.

“They are waiting for better (price) levels to get out,” he said. Major central banks have begun to raise interest rates because of higher inflation expectations. The market expects at least two more rate hikes from the United States Federal Reserve this year, after a 25-basis point hike in the federal funds rate in March to a range of between 0.75% and 1%, while the European Central Bank discussed a rate hike last month.

Higher interest rates will mean rising bond yields and falling bond prices.

The yield for the benchmark 10-year MGS had risen by 13.90% since Nov 7 until yesterday, resulting in lower prices.

A contentious issue among many traders continue to be Bank Negara’s clampdown on speculative currency trading via the non-deliverable forwards market, a move taken to stabilise the ringgit, which had weakened drastically following the election of Donald Trump as US president.

“Confidence has certainly been affected by the Bank Negara measures disallowing foreign banks from selling their ringgit holdings,” the currency trader said.

Another currency trader said the ringgit would not strengthen unless there were stronger portfolio inflows into the country, or a stronger downtrend for the US dollar.

“There is still huge demand for the greenback out there from both locals and foreigners, and under the present scenario, I don’t see where a matching inflow will come from,” he said.

The selldown in bonds has not affected Malaysia’s foreign exchange reserves, as it had risen to US$95.4bil at the end of March from US$94.9bil in the middle of last month.

Kenanga Investment Bank Bhd said in an April 11 report that foreign funds could be switching to equities from bonds, as total net portfolio flow may be turning positive for the first quarter ended March 31.

This can also be seen in Bursa Malaysia’s benchmark FBM KLCI, which has been on an uptrend, and the stable ringgit.

Kenanga said this suggests that foreign funds have not fully repatriated their funds and that a slightly positive gain in foreign reserve may indicate that the capital account in the balance of payments would turn out positive, which often times can be attributed to a net gain in portfolio investments.

“MGS’ loss is Bursa’s gain and the reason why the ringgit has been stable is that there has not been much fund outflows, as these funds have gone to equities,” a trader told StarBiz.

Usually, when investors sell Government bonds, currencies weaken because of the fund outflow as these funds get repatriated.

The trader also said the weaker US dollar has helped support the ringgit at current levels.

The ringgit appreciated to RM4.428 against the greenback yesterday from RM4.436 on Tuesday.