Local bond market at more stable level

> Non-resident holdings gradually declining but current reversal not out of the norm, says professor

PETALING JAYA: A lower share of nonresident holdings in the local bond market is expected to result in a less volatile market, while a decline in foreign investors’ interest will reduce demand pressures, said Sunway University Business School Professor of Economics Prof Dr Yeah Kim Leng.

Bank Negara Malaysia on Tuesday reported that non-resident holdings of Malaysian government securities reduced by RM21.8 billion in between the peak in November 2016 and March 6, 2017.

“Of the total reduction, 70% or RM15.2 billion were in the short-tenured securities of three years and less, suggesting that the current outflow is caused mainly by short term capital which are typically volatile,” he said in a commentary released to the media yesterday.

Yeah said given that there were periods whereby non-resident holdings of government securities rose from below 30% to 40% and then declined subsequently, the current reversal is not out of the norm.

“It is also within the absorptive capacity of large local investors such as the pension funds and insurance companies which have been facing a shortage of giltedged securities to balance their investment portfolios,” he added.

Nevertheless, BNM reported that the Malaysian bond market had expanded to RM1.2 trillion or 90% of gross domestic product (GDP) as at end-2016, in which the market grew at an average pace of 10.5% annually since 2006.

Yeah said the sustained growth reflects the attractiveness of the domestic debt capital market in meeting the financing needs of both the government and the private sector.

“Despite recent turbulences in the global bond markets caused by the global financial crisis, the Eurozone sovereign debt crisis, the 2013 Taper tantrum and more recently UK’s referendum to exit the EU and the surprise election of President Trump, the ringgit bond has remained resilient. Its stability has contributed to the sustained growth of the economy despite the various external headwinds,” he added.

Yeah said another positive effect of the bond market’s continuing growth is the sustained diversification of country’s credit risks away from the banking system.

“This shift which began in earnest following the Asian Financial Crisis in 1998 continues unabatedly as indicated by rising share of corporate bonds from 32% of GDP in 2006 to 43% in 2016,” he said, noting that the share is anticipated to rise further with an estimated net issuance of RM80 billion projected for this year.

On the demand side, Yeah said the bond market continues to provide pension funds, insurance companies and asset managers with an indispensable asset class in the form of fixed income securities to manage portfolio risks.