KUALA LUMPUR: Foreign investors dumped a whopping RM26.2 billion in Malaysian bonds in March 2017 — the biggest monthly sell-off since the data was collated by Bank Negara Malaysia (BNM) in 2011.
The bulk of the bond sell-off were in Malaysia Government Securities (MGS), which amounted to RM23 billion. Foreign investors’ holding of MGS fell to 38.5% in March from 44.7% in February.
Other securities sold include RM600 million of Government Investment Issues, RM500 million of Treasury bills and RM3.4 billion of BNM bills. There was net purchase of RM1.3 billion of private debt securities.
The latest sell-off brings total bonds sold by foreign investors to RM62.7 billion since November last year.
The data also shows foreign investors’ holdings of Malaysian bonds fell for a fifth straight month, outpacing the previous record slump of RM18.9 billion in November last year following the election of Donald Trump as US president. The unexpected outcome triggered a bond sell-off in emerging economies on concerns about rollback of the US Federal Reserve’s bond-buying programme.
An economist from a local research firm said the recent bond sell-off is raising concerns about Malaysia’s bond market at a time when the emerging-market bonds have attracted close to US$20 billion (RM88.6 billion) as of the first quarter of 2017 (1Q17).
“It is strange because while there is a strong inflow into the other bond markets, Malaysia has seen a record high of foreign bond sell-offs,” he told The Edge Financial Daily.
The economist is of the view that the recovery of the ringgit against the US dollar has more to do with the weakness of the US dollar.
“If you look at the first quarter’s performance, the US dollar index has weakened by about 1.8%. Among Asia’s currencies, Malaysia only outperformed the yuan, Hong Kong dollar, Indonesia’s rupiah and the Philippine’s peso as of the first quarter. Year to date (YTD), the rupiah has already strengthened against the ringgit,” he added.
The ringgit closed 0.06% higher at 4.4335 to the US dollar yesterday. YTD, the local currency has strengthened by 1.2% against the greenback.
In a report dated April 10, UOB Malaysia economist Julia Goh noted the bond markets in India, Indonesia and Thailand attracted a flow of US$5 billion in March 2017.
The JP Morgan Government Bond Index-Emerging Markets Index — a comprehensive emerging-market debt benchmark that tracks local currency bonds issued by emerging-market governments — has gained by 6% YTD.
Goh believes that sustained bond selling would weigh on the local currency, but the sell-offs’ impact is cushioned by the strength of local institutional funds, with the Employees Provident Fund (EPF) raising its holdings of government securities.
“Since BNM implemented the requirements for exporters to convert at least 75% of their export proceeds into the ringgit, this has increased the supply of US dollars which helps buffer foreign reserves,” she said.
“Last week, Second Finance Minister Datuk Johari Abdul Ghani reassured investors that Malaysia sees no need to impose further steps to stabilise the ringgit and domestic growth should provide ammunition for the currency to strengthen.”
In a report yesterday, Kenanga Research said despite March’s record sell-off in the bond market, Malaysia’s foreign reserves inched up US$400 million to US$95.4 billion at end-March, while the ringgit has strengthened by about 1.5% against the US dollar in 1Q17.
The research firm expects the bond selling to subside, largely supported by local institutional funds’ buying strength, led by the EPF.
“Last year, it (EPF) invested 23.8% of its total asset size of RM703 billion or RM167 billion in federal government securities. As it had already increased its purchase of federal government securities by 2.5% or RM4.1 billion in January, presumably to absorb the foreign sell-offs, we will not be surprised that it would surpass last year’s total investment in government securities.
“Perhaps a reversal in the equity market would also pull some of the money back to the safety of government bonds,” it said.
In a report dated April 10, Maybank Investment Bank fixed-income analyst Winson Phoon pointed out that while concerns of additional outflow risk is valid, foreign positioning in domestic bonds has become less of a threat to the country’s external vulnerability.