Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on January 17, 2022 - January 23, 2022

Foreigners have been pouring money into the Malaysian bond market, a development that could prove to be painful when there is a reversal in global financial flows.

At the end of last year, foreigners held about 25%, or RM234 billion, of Malaysia’s total government bonds. The bulk of the foreign funds went into Malaysian Government Securities (MGS), in which they held 39.4% of the total outstanding as at end-2021.

Generally, the low interest rate environment in the US has led to funds putting money into emerging markets, Malaysia included. Their favoured investments are government bonds with yields that are higher than US Treasuries and where the exchange rate is fairly stable.

Malaysia falls into the category where its exchange rate against the US dollar is within a close band and the government debt offers competitive yields compared to that of US Treasuries.

But the flow of funds will change when the US starts to raise interest rates, which could happen as early as March. Senior members of the Fed have alluded to the US having up to three rate hikes in 2022 in its bid to tame inflation, which is at 7%.

The US Federal Reserve is known for its aggressiveness when it comes to handling the US economy. When Covid-19 started to evolve into a pandemic in 2020, bringing the country’s economy to a standstill, the central bank brought down the interest rate from 2.45% to almost 0% within a few months.

Now, it is looking at raising rates aggressively as well. The federal funds rate is currently between 0% and 0.25%; within six months, it could get closer to 1%.

The ringgit, like other emerging market currencies, will come under pressure even if there is a rate hike by Bank Negara Malaysia. In the past, the biggest selling was by foreign funds holding the debt paper, and it will be no different this time.

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