Increased foreign interest in Malaysian bonds

Foreign appetite for Malaysian bonds has been increasing over the year, with international buyers moving into the market for government papers as investors seek higher returns and market stability.

Foreign ownership rises

According to data issued by Bank Negara Malaysia (BNM) – the country’s central bank – foreign ownership of government and corporate bonds peaked over the summer, with July and August both setting records, first at RM240.9bn ($58.3bn), up by 2.4% month-on-month (m-o-m), and then rising to RM246.9bn ($58.5bn) in August.

In July foreign ownership of Malaysian government securities (MGS) stood at RM209.7bn ($50.7bn), a m-o-m increase of 13%. The July rise took the level of foreign holdings of MGS to a record high 51.9% of the total, up from 49.8% in June, Muhammad bin Ibrahim, governor of the BNM, said when announcing the economic indicators for the month.

August set another record, with RM213.85bn ($51bn) of MGS owned by overseas investors, up another 2% m-o-m. However, September saw the first fall in foreign ownership for a year, dropping 2.6% to RM208.29bn ($49.6bn). When corporate bonds and bills were added to the mix, the total of foreign-owned investments stood at RM238.49bn ($56.7bn), a fall of 3.4% and the first decline in four months.

Analysts put the change in trajectory largely down to debt maturities, with RM19.7bn ($4.7bn) worth of sovereign debt maturing in September.

“The decline in foreign holdings is primarily maturity-driven,” Winson Phoon, a fixed-income analyst at Maybank Investment Bank, told international media in October, noting that the current outlook is neutral “with a cautious tone for foreign demand”.

Yields ease, appeal remains strong

The strong interest in MGS – which are primarily held by long-term investors, including pension funds, central banks and governments, insurance companies and commercial lenders – came despite a slight easing of yields on Malaysia’s three-, five- and 10-year bonds in July, though rates were still well above those in most developed economies.

With yields on 10-year MGS at 3.5% – a far more appealing option than the negative interest rates offered by 40% of developed market government bonds – Malaysian papers are becoming increasingly attractive to fund managers.

Many fund managers are moving away from their underweight position on emerging markets of the past few years, resulting in increasingly strong foreign capital flows into Asian markets, according to David Ng, chief investment officer of investment managing firm Affin Hwang Asset Management.

“In Malaysia, especially, we are seeing strong inflows into our MGS,” Ng said at a media briefing in October. “I would say that most of the bad news in the Malaysian market has already been priced into the market.”

With very low or negative interest rates being offered in many economies, investors are on the look out for better returns, with emerging markets such as Malaysia being a natural choice, according to Danny Wong, CEO of fund management company Areca Capital.

“Malaysia will be one of the beneficiaries in this round of foreign capital inflows, as its equity market has yet to run up as much as its counterparts in this region, while its bond market continues to offer reasonably better yields,” Wong told local media in August.

Positive outlook

While external factors – in particular a move by the US Federal Reserve to raise rates, thus weakening appetite for developing market debt – could reduce foreign investor interest in Malaysian securities, it is probable that international interest in MGS may continue for some time to come.

Weaker employment data out of the US, released at the beginning of September, makes a rate move by the Federal Reserve less likely, leaving open the window for investors to continue buying into Malaysian securities through to the end of the year.

At the beginning of September, investors were also given a confidence boost, when ratings agency Fitch reaffirmed Malaysia’s long-term foreign- and local-currency issuer default ratings at “A-”, while also maintaining its stable outlook for the country’s economy. The rating and outlook were reflections of the relatively positive situation of the economy, according to the agency.

“Malaysia’s rating of ‘A-’ reflects its strong net external creditor position, real GDP growth that remains stronger than the median of ‘A’ rated peers and a current account that is still in surplus, although it has been narrowing,” the Fitch statement said.

Fitch’s forecast that the Malaysian economy would expand by 4% for the year, combined with a projected decline in government debt ratio to 54% of GDP, will help keep Malaysia’s net external creditor position to remain in line with the “A” median at the end of 2016, the agency said.

Meanwhile, ratings agency Moody's stated that the current credit rating of “A3”, with a stable outlook, is consistent with the focus on near-term fiscal consolidation of the 2017 budget, as government authorities target a fiscal deficit of 3% of GDP for next year.

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