The Malaysian bond market recorded a total net foreign outflow of RM19 billion in the first eight months of 2018, amid financial market turmoil in the emerging markets (EMs), according to MARC. NST file picture.

KUALA LUMPUR: The Malaysian bond market recorded a total net foreign outflow of RM19 billion in the first eight months of 2018, amid financial market turmoil in the emerging markets (EMs).

Malaysian Rating Corp Bhd (MARC) said foreign holdings of Malaysian Government Securities (MGS) and total Malaysian bonds had stood at 40 per cent and 13 per cent of total outstanding in August, down from the previous month’s 41 per cent and 14 per cent.

Last year, the Malaysian bond market recorded a net foreign outflow of RM8.9 billion after posting a net inflow of RM0.8 billion in 2016.

In its report, MARC noted that financial turmoil in EMs had continued in August as the Turkish lira slumped significantly against the US dollar, following fears of an escalating US-Turkey diplomatic feud.

The report highlighted that there were also concerns over President Recep Tayyip Erdogan’s control of Turkey’s monetary policy, which would add to the woes in the absence of a breakthrough in US-China trade talks.

“It led to the second wave of US tariffs being imposed on US$16 billion worth of Chinese goods, along with retaliatory China tariffs on an equal amount of US goods,” MARC said in a statement today.

In August, the Malaysian bond market saw a net foreign outflow of RM2.4 billion compared with a net inflow of RM4.0 billion in the preceding month.

MARC said the drop in foreign ownership was also partly due to the increase in matured Government Investment Issue (GII) papers in August, which came in at RM8.5 billion.

“Although risk-averse sentiment against emerging market assets worsened and foreign ownership of local bonds fell, secondary market performance of local govvies was supported at the end of August,” it said, adding that this came on the back of anticipation of a softer Malaysian economy.

MARC said the buying interest was concentrated on MGS at the short-end of the curve, citing that yields of short-term MGS fell faster than those of longer tenures amid expectations that Bank Negara Malaysia would keep its key Overnight Policy Rate (OPR) unchanged at 3.25 per cent for the rest of 2018.

“Yields on local govvies hovered slightly higher during the first-half (1H) of the month amid weakness in the ringgit and a fall in crude oil prices. Yields began to ease during the second half of the month after the release of the lower-than-expected second-quarter (Q2) 2018 gross domestic product (GDP) growth data by Bank Negara.

MARC said China’s move to support the yuan and a surge in crude oil prices in the final week had also brought some support to local govvies.

As of end-August, the 10-year and 3-year MGS spread was wider at 56 bps compared with 50 bps in July due to the foreign fund outflows, the ringgit continued to weaken in August, in line with the performance of other emerging market currencies.

“It fell by 1.1 per cent against the US dollar to settle at RM4.1090, compared with RM4.0652 in the preceding month. This marked a nine-month low since December 2017.”

MARC said the ringgit had extended its weakening against the US dollar to end at its weakest monthly level for 2018 so far.

It lost 438 percentage-in-point month-on-month against the greenback to settle at RM4.1090 in August compared with RM4.0652 recorded in the previous month.

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