The Edge Market: MARC: Local ‘govvies’ in secondary market continues to weaken but foreign holdings rebound first time in 3 months

The Edge Market

KUALA LUMPUR (Nov 13): Malaysian Rating Corp Bhd (MARC) said local government bonds (govvies) in the secondary market continued to weaken in October, moving in tandem with the fall of the ringgit and the surge in UST' (U.S. Treasuries) yields.

“Trading momentum was also weaker with about RM44.0 billion changing hands (September: RM59.1 billion). The pressure came primarily from the prospect of higher US interest rates, given the slew of positive US economic data releases, although Malaysia’s fiscal concerns also contributed to the weakening. There was also pressure coming from the release of Malaysian exports data showing a sharp down in August,” the ratings agency said in a statement today.

“The 10 years Malaysian Bond Securities (MGS) settled one basis point (bp) higher at 4.08% compared with September’s 4.07%. The benchmark MGS yield curve as of end-October was slightly steeper with yields along the short-end to the belly of the curve up by one bp to six bps, while yields at the long-end were up by seven bps to ten bps. Meanwhile, the 10years/3years MGS spread was narrower at 42 bps, compared with 46 bps previously,” MARC added.

MARC noted foreign investors, however, had increased their holdings of govvies for the first time in three months, despite the continued weakness of local govvies in the secondary market and Ringgit.

In October, foreign investors increased holdings of local govvies by RM5.4 billion or 3.23% month-on-month (m-o-m) to RM172.7 billion, compared from RM167.3 billion recorded in September. The increase was largely due to the significant rise in foreign ownership of MGS papers. MGS recorded a foreign inflow of RM4.7 billion in October (September 2018: -RM5.6 billion), representing 87.2% of total foreign inflows from local govvies.

As of end-October, total foreign holdings of MGS came in higher at RM153.0 billion (September 2018: RM148.3 billion), equivalent to 40.7% (September 2018: 39.5%) of total outstanding of RM375.8 billion. Meanwhile, foreign holdings of Government Investment Issues (GII) and treasury bills also registered positive foreign flows in the same period. By end-October, foreign investors held 25.5% (September 2018: 24.6%) of total outstanding local govvies.

For the corporate bond front, total gross corporate bond issuances increased in October to RM13.6 billion (September: RM7.2 billion), thus reversing the previous month’s decline. The rise was mainly attributed to increase in issuances in the rated corporate bond segment, which came in at RM7.8 billion (September: RM4.5 billion). The other corporate bond segments also registered increases.

“The top issuer in October was Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA). It issued five tranches of unrated government-guaranteed (GG) Islamic Medium-Term Notes (IMTN), amounting to RM3.0 billion, to finance the provision of housing loans to government employees,” MARC said.

Year-to-date (YTD), the total gross issuance of corporate bonds was lower by 8.2% year-on-year (y-o-y) at RM89.3 billion (2017 YTD: RM97.1 billion). The rated corporate bonds segment, valued at RM47.4 billion and with infrastructure and utilities, as well as financial services dominating, accounted for 53.0% of overall issuances. DanaInfra Nasional Bhd (RM7.9 billion), Cagamas Bhd (RM7.1 billion) and LPPSA (RM6.0 billion) were the top issuers YTD in 2018.

In the primary market for corporate bonds, MARC said the total gross issuance of MGS and GII is on track to meet its full-year 2018 projection of corporate bonds issuances of between RM100 billion and RM105 billion.

As for October, the combined total outstanding of MGS and GII came in lower again in October at RM698.7 billion (September 2018: RM702.2 billion). The drop was mainly due to lower total gross issuance (RM7.0 billion) and the large volume of matured papers (RM10.5 billion).

YTD, the total gross issuance of MGS/GII papers was higher by 3.2% year-on-year (y-o-y) at RM96.5 billion (2017 YTD: RM93.5 billion). GII continued to dominate total gross issuance YTD with the GII-to-MGS ratio coming in at 52:48 (2017YTD: 51:49).

MARC noted that the ringgit had continued to depreciate against the US dollar in October, ending the month at its weakest level thus far in 2018. Compared with end-September’s RM4.1383, it was lower by 459 pips (price movement) at RM4.1842.

As at time of writing, the ringgit was at RM4.1940 against the greenback.