Malaysian bond market less appealing after US elections

308

The spreads between the buying and selling quotes for bonds in the Malaysian bond market seemed to have lost its appeal.

The Malaysian central bank, Bank Negara Malaysia (BNM) said the spreads between buying and selling are now relatively narrower at 20 to 50 sen compared to the peak of RM2 during the low liquidity period post US elections.

The central bank also said portfolios by Non-resident holdings in the bond market is gradually declining.

This is possibly due to a direct impact of the non-deliverable forward (NDF) measures by BNM.

In 2016, NR holdings peaked at 34.7 percent and have been declining (post US elections and post NDF measures by the Bank) to 28.7 percent as at end February 2017.

The sell-down was largely from shorter term papers which are mainly attributed to the unwinding of NDF positions by NR financial institution investors.

NR holdings of less than three years maturity reduced by RM15.2 billion from November 2016 to-date, comprising 70 per cent of the reduction in NR holdings of government bonds.

This type of short-term flows has been destabilizing particularly when it reacts to global and regional developments.

Since the bulk of the fund flows were driven by short-term arbitrage that capitalised on the NDF market, BNM does not think a recurrence would occur.

Thus, it said, in the future, the level of participation of NR investors could thus settle at a lower but more stable level.

The Malaysian bond market continues to grow with the current outstanding value of RM1.2 trillion or 90 percent of GDP and an average annual growth rate of 10.5 percent for the past ten years.

In 2017, a net bond issuance of RM80 billion is expected. The size of Malaysia’s bond market relative to GDP remains the largest in Southeast Asia and the third largest in Asia, said BNM.

There is also a diverse range of investors in the Malaysian bond market comprising pension funds, asset management companies, banks, insurance companies and NR investors.

“With the presence of domestic investors and active market making initiatives by a number of principal dealers supported by the Financial Markets Association Malaysia, the secondary market liquidity has improved.” the central banker said.