KUALA LUMPUR (Sept 14): The Malaysian bond market saw a net foreign outflow of RM19 billion over the past eight months (January to August), amidst financial turmoil seen in the emerging market, as the Turkish lira slumped significantly against the US dollar, as well as amidst uncertainties in global trade with the absence of a breakthrough in US-China trade talks, according to Malaysian Rating Corporation Bhd (MARC).

MARC pointed to the financial turmoil that hit the EM, led by the collapse of the lira, following an escalating US-Turkey diplomatic feud, as well as concerns over President Recep Tayyip Erdogan’s control of Turkey’s monetary policy.

“Adding to the woes was the absence of a breakthrough in US-China trade talks. It led to the second wave of US tariffs being imposed on US$16 billion worth of Chinese goods, along with retaliatory China tariffs on an equal amount of US goods,” it said in a statement today.

In its report entitled “Monthly Bond Market & Rating Snapshot — August 2018”, MARC highlighted foreign ownership of local govvies (Malaysian government securities (MGS) and Government Investment Issues (GII)) fell to 23.4% of total outstanding in August, as compared to 24.0% in July.

The decline was mainly attributed to increasing fear of an EM contagion, sparked by lingering concerns over the heightening US-China trade tensions and the currency crises seen in Turkey, as well as in Argentina.

Another factor that led to the drop in foreign ownership of local govvies was the significant increase in volume of matured GII papers, which amounted to RM8.5 billion.

However, despite the negative sentiment against EM assets and reduction of foreign ownership of local bonds, secondary market performance of local govvies was supported at the end of August, MARC noted.

“This came on the back of anticipation of a softer Malaysian economy, going forward. In the later part of the month, buying interest was concentrated on MGS at the short-end of the curve.

“The yields of short-term MGS fell faster than those of longer tenures, amid expectations Bank Negara Malaysia (BNM) will keep its overnight policy rate (OPR) unchanged at 3.25% for the rest of 2018,” the statement said.

It noted that the 10-year and 3-year MGS spread was wider at 56 basis points (bps) in August, as compared with 50bps in July.

Due to the foreign fund outflows, the ringgit continued to weaken in August, in line with performance of other emerging market currencies. It fell by 1.1% against the US dollar to settle at RM4.1090 in August, compared with RM4.0652 in the preceding month. This marked a nine-month low since December 2017.