This article first appeared in The Edge Financial Daily on June 14, 2019

KUALA LUMPUR: Foreign holdings of Malaysian bonds dropped by RM4.2 billion in May to the lowest level since December 2011, according to Malaysian Rating Corp Bhd (MARC).

In its Monthly Bond Market and Rating Snapshot for May 2019, the rating agency said the total foreign ownership had declined to 11.9% of the total outstanding as outflows increased following a weaker ringgit, falling crude oil prices and slower gross domestic product growth in the first quarter of 2019.

Expectations of a prolonged US-China trade war also caused foreign investors to shrug off local bonds.

MARC said that in May, foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issues (GIIs) also dropped to 35.8% and 4.5% respectively of the total outstanding, while treasury bills saw a net foreign outflow of RM10 million.

On the flip side, there was a minor increase in foreign purchases of corporate bonds (RM900 million), said the rating agency.

Notwithstanding this, MARC said foreign sell-offs in May were mitigated by increased buying interest of local investors.

It said yields along the short end to the belly of the curve were down by one to 10 basis points (bps), while yields further up the curve were down by 5bps.

The 10-year MGS were down by 1bp to 3.78%.

MARC said demand was mainly driven by the cut in the overnight policy rate (OPR), Bank Negara Malaysia’s (BNM) measures to boost both the bond and foreign exchange markets, and steady April Consumer Price Index (CPI) growth.

“Meanwhile, the primary market for MGS and GIIs also received heavy support from local investors.

“All tendered issues were oversubscribed with heavy bidding interest slanted towards the GII papers, with the 30.5-year and 15.5-year GIIs registering bid-to-cover (BTC) ratios of 3.3 times and 3.4 times [respectively]. However, the 10-year MGS only recorded a BTC ratio of 1.8 times,” it said.