KUALA LUMPUR, June 14 (Xinhua) -- Foreign holdings of Malaysian bonds were down 12.9 billion ringgit (3.01 billion U.S. dollars) in May, due to increased market volatility amid heightened domestic and foreign uncertainties.
According to Malaysia's RAM Rating Services report Thursday, the value of foreign bond holdings in Malaysia declined 6.3 percent month-on-month to 192.5 billion ringgit in May - the lowest level since August 2017.
The share of foreign-held Malaysian Government Securities (MGS) to total outstanding MGS was also reduced to 41.9 percent, from 44.3 percent in April.
"Market sentiment is significantly softer subsequent to the 14th Malaysian general election (GE14)," it said.
It opined that the fiscal impact of the execution of the new government's election promises such as the reintroduction of a fuel subsidy, zero-rating of the goods and services tax (GST) and abolition of motorway tolls, is a concern among market players as these moves could have an adverse effect on the country's sovereign credit ratings and currency.
The renewed worries about national debt levels, the ongoing review of mega infrastructure projects and shifts in key management positions in several government-related entities and institutions, including Malaysian Central Bank, have also made market players more wary, RAM also said.
Meanwhile, external threats from trade wars, geopolitical tensions and further U.S. Federal Reserve and European Central Bank liquidity tightening may also fuel the current sell-off in emerging markets such as Malaysia.
According to RAM, foreign investment in short-term Malaysian bonds decreased by 2.3 billion ringgit in May as investors priced in for a U.S. rate hike prior to the Federal Open Market Committee (FOMC) meeting in June.
FOMC on Wednesday raised its rates by 25 basis points, bringing the Federal Funds Rate to 1.75 percent to 2 percent. It also guided two more rate increases this year, supported by U.S. better economic growth, unemployment and headline inflation expectations.
With a more steadfast tightening trajectory, RAM expects an increased upward pressure on domestic yields as foreign holdings continue their decline.
According to the report, Malaysian bond yields across almost all rating bands and tenures had risen in May as a result of persistent selling.
"Rising bond yields, which translate into a higher cost of borrowings, could have also impeded issuances and may hold back debt issuances going forward," it said.
It is noted that corporate bonds recorded the lowest monthly issuance for the year in May at 6.8 billion ringgit, which could also be due to issuers having withheld issuance ahead of GE14.
Besides, as about 21.2 billion ringgit and 14.5 billion ringgit of Malaysian Government Securities or Government Investment Issue are expected to mature in the third quarter and fourth quarter, respectively, RAM believed this could instigate further outflows from the Malaysian bond market.
However, RAM highlighted that it was not the first time that Malaysia sees significant foreign bond outflow, as the market had seen a similar reaction during the taper tantrum in 2013 when the monthly net outflow reached a peak of 13 billion ringgit in July that year.
"That said, market sentiment may improve as new government policies emerge, giving rise to greater confidence among market players and potentially relieving some outflow stress on the market," said Kristina Fong, RAM's head of research.