Foreigners Stay Away From Malaysia 30-Year Bond

September 30, 2013, 7:32 a.m. ET

Foreigners Stay Away From Malaysia 30-Year Bond

Bankers Say Domestic Pension Funds, Insurers Bought the Inaugural Issue

ANJANI TRIVEDI

With markets jittery over the looming shutdown of the U.S. government, Malaysia’s central bank sold 2.5 billion ringgit of 30-year bonds, the country’s longest-maturity offering ever, but foreign investors stayed away. Malaysia has seen cash flow out of the country as investors became convinced the U.S. Federal Open Market Committee would scale back the Federal Reserve’s monetary easing—also known as quantitative easing or QE—sending the local currency down 9% from its peak.“If we look at the flow from the last few weeks since FOMC, we’ve seen a big outflow from this side. That has left foreign investors less interested,” said Wan Mohd Fakruddin Razi, chief investment officer at MCIS Zurich Insurance Bhd. in Kuala Lumpur. Investors aren’t willing to take the currency risk and “bring in new money,” he said.

One concern among investors has been Malaysia’s debt. The country had $145 billion of local-currency government bonds outstanding—one of the highest levels in the region—as of June 30, according to the Asian Development Bank. Indonesia has $89 billion of outstanding government bonds, Thailand has $104 billion and Vietnam has $26 billion.

The inaugural 30-year ringgit issue, which matures in 2043, priced at 4.935%, was oversubscribed by nearly 2.5 times. U.S. Treasurys of similar maturity yielded 3.7%. The bond will be used to fund Malaysia’s multibillion-dollar infrastructure program and extend its debt profile.

“I think that [the yield] is giving us the indication of the quality of the bonds—in a positive way–given the government is ensuring economic growth and stability in the country,” Mr. Wan said.

Bankers familiar with the matter say the benchmark offering mainly drew domestic pension funds and insurers.

“What I have been told is that they all bought as they can hold to maturity, as they are so long-term,” said Kuala Lumpur-based Shireen Muhiudeen of Corsten-Smith Asset Management. “This also helps the liability management.”

Malaysia’s investment-grade-rated sovereign debt has historically seen high levels of foreign buyers, but recent months have seen a selloff. Foreign ownership of government bonds fell from 49.5% in May to 40.0% in July, according to the latest available data from Bank Negara Malaysia, the central bank.

“It all depends on what the downside risk for the ringgit is and where the U.S. is headed,” Mr. Wan said. “It’s a tough call right now and depends on what will be Fed’s decision on QE. It’s all been priced into the current value of the ringgit and the current value of the bonds.”