Foreign investors in Malaysia’s bond markets have stayed put through months of economic and political uncertainty but a sudden spurt in currency volatility appears to be testing that allegiance.
Foreign fund managers and other investors have been heavily invested in Malaysia - they hold nearly half of outstanding government bonds - through the ringgit’s slide in the first half of the year on worries about US monetary policy tightening, falling global oil prices and a scandal at a local state fund.
They sold some assets in July as the ringgit’s losses mounted, cutting holdings to 206.8 billion ringgit (US$50.7 billion), the lowest since August 2012. Outflows last month were 5.2 billion ringgit, central bank data showed.
But that trickle could become a flood if investors lose faith in the ability of Malaysian authorities to defend the currency. The ringgit is Asia’s worst performer this year, down 14 per cent against the dollar.
Last week it hit a 17-year low past 4.15 per dollar, levels not seen since before it was pegged in September 1998. At the same time, it has turned volatile, swinging as it had on very rare occasions in 2013 and 2010.
"We see value in Malaysian bonds as the yield is attractive for its investment grade rating, but are cautious as we expect further currency volatility," said Guan Yi Low, investment director of fixed income at Eastspring Investments in Singapore.