KUALA LUMPUR (March 29): Non-residents were net sellers in the domestic government bond market in 2022, with a net outflow of RM7.8 billion, according to Bank Negara Malaysia (BNM), a trend that it said was also observed in many other emerging economies amid expectations of tighter global monetary conditions.

Nevertheless, it said the domestic bond market remained resilient last year, despite heightened market volatility in an environment of rising interest rates, and that non-resident flows turned positive from November — in line with regional trends, amid the relatively attractive return of domestic government bonds, BNM noted in its Financial Stability Review report for the second half of 2022 released on Wednesday (March 29).

The share of non-resident holdings in the government bond market increased marginally to 22.8% year-to-date, compared with 22.2% recorded as at December 2022. The average seen in 2015 to 2019 was 27%.

Meanwhile, domestic institutional investors such as banks, non-bank financial institutions, and insurers and takaful operators, remained active in the government bond market, with a net purchase of RM56.7 billion in 2022 (2021's net purchase was RM51 billion), supporting market liquidity amid volatile non-resident flows.

The 10-year Malaysian Government Securities (MGS) yield rose 51 basis points (bps) in 2022, following the 100 bps increase in the overnight policy rate in the same year.

"At the peak, yields rose to 4.55% in late October, consistent with global yield trends, amid uncertainties around the outlook for global interest rates. Market liquidity remained healthy, with sustained demand for government bonds in the primary market, as evidenced by the average bid-to-cover ratio of 2.1 times between September 2022 and March 2023 (2015-2019 average: 2.3 times). 

"Meanwhile, in the secondary market, the daily trading volume of government bonds averaged RM3.3 billion between September 2022 and March 2023 (2015-2019 average: RM3.1 billion). Liquidity conditions were also largely unaffected by the expiry of the Statutory Reserve Requirement flexibility at the end of 2022, given the healthy liquidity buffers of banks," it noted.

More recently, liquidity conditions remained stable, following recent failures of some US banks. "Banks continued to have access to various types of instruments to manage liquidity, including repurchase arrangements (repo), reverse repo, FX (foreign exchange) swaps, and standing facilities with BNM," it noted.

The corporate bond market, according to the central bank, continued to function in an orderly manner last year in support of corporate fundraising activities.

"Gross corporate bond issuances rose sharply (August 2022-January 2023: RM94.7 billion; August 2019-January 2020: RM48.8 billion), driven mainly by a large issuance by a major toll road operator in December (RM25.2 billion). Corporate bonds remained as an attractive investment instrument for investors.

"Credit spreads between 10-year AAA papers and 10-year MGS remained broadly stable, reflecting sustained investor demand for corporate bonds (September 2022-March 2023 average: 56.1 bps; 2015-2019 average: 55.4 bps). This will continue to support orderly conditions," it added.

Don't miss the other highlights of the BNM Annual Report 2022. Read the articles here.