Malaysia To Sustain Foreign Interest In Bond Market

By Harizah Hanim Mohamed KUALA LUMPUR, Dec 30 (Bernama) -- The positive interest rate differential (IRD) offered by Malaysia will continue to attract foreign investors, hence, sustain their interest in the local bond market. And this would simultaneously offset the downward pressure on the ringgit, said Professor of Economics, Sunway University Business School, Dr Yeah Kim Leng. Malaysia's overnight policy rate stands at 3.0 per cent and even as the US interest rate has been revised upwards by 0.25 percentage point to a range of 0.5 and 0.75 per cent, the IDR remains attractive for the local market. "Despite the prospects of better US economic performance and higher interest rates in 2017 that will attract international funds to the US capital market, we still see a large proportion of international investors seeking emerging markets' exposure to meet their diversification and higher risk-returns objectives," he told Bernama. However, with interest rates normalising in the US, he expected foreign holdings of Malaysian bonds to decline to below 50 per cent from the current 51 per cent. As of end-November, foreign holdings accounted for 51 per cent or RM221.0 billion of the total bond holdings. Yeah, who is also one of the two external members of Bank Negara Malaysia's Monetary Policy Committee, noted that the 'melt down' in the ringgit, which was partly derailed by the selling of local bonds by foreign investors, would be capped by the better bond yields. He pointed out that the increased selling would exert a downward pressure on bond prices and pushed up bond yields. "Higher yields have the pull-effect to attract both local and foreign bond investors, in turn offsetting the downward pressure on the ringgit," he explained. The ringgit is currently traded at the 4.4800/4840-level, its lowest since the 1997/98 Asian financial crisis. Meanwhile, MIDF Amanah Investment Bank Bhd chief economist Dr Kamaruddin Mohd Nor opined that the IRD as well as sound economic fundamentals would still favour the Malaysian market. "However, confidence and sentiments will eventually dictate the direction of fund flows in 2017," he said. As for the 51 per cent foreign holdings of Malaysian bonds, he said more than half of these were held by long-term investors, who were likely hold the debt papers to maturity. Foreign holdings of Malaysian Government Securities and Government Investment Issues, which constituted 88.7 per cent of total foreign holdings at end-November, posted a combined outflow of RM18.8 billion in November. During the month, the Malaysian bond market saw the largest net monthly outflow of RM19.9 billion as investors juggled between yield search and risk aversion. -- BERNAMA