KUALA LUMPUR (Oct 14): Foreign holdings of local bonds increased in September, thanks to FTSE Russell's decision to retain Malaysian bonds in its World Government Bond Index (WGBI) despite keeping them on its watchlist, said Malaysian Rating Corp Bhd (Marc).

During the month, the local bond market was also supported by heightened expectations of an overnight policy rate cut in November, said Marc chief economist Nor Zahidi Alias.

He said foreign investors raised their local bond holdings to RM189.1 billion during the month, from RM188.2 billion in August.

However, the proportion of foreign holdings of local bonds remained around 12.6% as total outstanding local bonds fell due to the large volume of matured government investment issue (GII) papers.

Total foreign holdings of Malaysian government securities (MGS) rose to RM154.2 billion in September from RM153.7 billion in August, while foreign share of the total outstanding fell slightly to 37.5% as gross issuance slowed.

"Year to date, cumulative flows into local bonds for the first nine months surged to RM4.3 billion compared with RM3.4 billion registered in the first eight months in the same year," Nor Zahidi said in a statement.

"By instrument, cumulative foreign flows into MGS stood at RM8 billion while cumulative foreign flows into other instrument types remained negative," he added.

Nor Zahidi said outstanding MGS and GII papers fell to RM766.0 billion in September from RM768.5 billion in August, due to higher volume of matured papers, pushing net issuance into negative territory for the month.

"Gross issuance also fell during the month, totalling RM5.5 billion (August: RM10 billion) with GII contributing to most of the decline. Year to date, overall gross issuance of MGS/GII grew by 3.9% y-o-y to RM93.0 billion (2018YTD: RM89.5 billion)," he said.