Malaysia hits back after 30-yr bond sale

Malaysia’s central bank has defended the level of overseas interest in its recent record-breaking 30-year bond after comments that foreign investors had stayed away from it out of concern about the country’s economy.

On 27 September , Bank Negara Malaysia sold RM2.5 billion ($779.4 million) in 30 year bonds — the longest tenor the sovereign has ever attempted. The deal was successful, with an order book more than 2-1/2 times the size of the final deal and a weighted average yield of 4.935%, impressive for such a long-term security.

However, coverage of the deal has mainly focused on the apparent lack of foreign participation within it, with domestic pension funds and insurers understood to have bought the bulk of the deal. Since foreign ownership of government bonds has fallen from 50.5% in May to 40% in July, this was seen as further evidence of foreign aversion to Malaysia and emerging markets debt generally, and indicative of likely further outflows.

But in written comments to Emerging Markets, Bank Negara has provided further data and defended the deal. "The auction saw diverse investor interest with strong participation by insurance companies and institutional investors who acquired 32% and 23% of the issuance, respectively," the bank said. It pointed out that non-resident (foreign) investors took 12% of the total issue size. "This ratio is high for Malaysian government securities of this long tenure", the bank added, and said that the deal "marked another milestone in the development of the Malaysian bond market and yield curve".

While foreign participation is still usually higher than 12% in Malaysian local currency debt deals, the bank is correct in pointing out that this was a longer tenor deal than has been tried before and therefore naturally more appealing to domestic institutions needing buy-and-hold long term local currency debt. Nevertheless, some investors voiced concerns about Malaysia’s financial position, with $145 billion of local currency government bonds outstanding on June 30, according to the Asian Development Bank, which put the figure in Indonesia at $89 billion, and Thailand $104 billion.

Asked about outflows, Bank Negara said that after a May 2013 peak, emerging markets had begun to experience outflows on the back of concerns about QE tapering. But it said: "Despite liquidation by non-residents, [their] holdings of MGS [Malaysian Government Securities] remained high at 42.6% in mid-September 2013. More importantly, the domestic bond market is deep and liquid and able to withstand the outflow as reflected in a relatively smaller increase in the bond yields compared to other markets." The bank said that foreign holdings have since increased to 44% of total outstanding ringgit debt.