Japanese investors lap up Malaysian debt

[Singapore] Japan's purchases of Malaysian debt have hit record levels this year as investors with cheap yen hunt for assets that offer investment grade ratings, low volatility and decent returns.

Data from the Bank of Japan and Toushin Investment Trusts Association tells of a jump in Japanese flows into Malaysian bonds and a shift away from South Korea where they have traditionally been big buyers.

Based on data currently available, net inflows of yen investments in Malaysia from January to July were 173.5 billion yen (US$1.63 billion). Toushin holdings, which are mainly retail Japanese investments, have jumped 20.9 billion yen so far in 2014 to a total 47.48 billion yen at the end of August.

Korean debt markets have seen net outflows of Japanese investment, totalling 135 billion yen in the first eight months of the year. Indonesia has received just 31.5 billion yen in that period while Thailand received 55 billion yen. "Malaysia is relatively higher rated, Malaysian government securities are part of emerging market indices, it has no withholding taxes and relatively low volatility," said Credit Suisse strategist Ashish Agrawal, listing the numerous reasons Malaysian debt sees large foreign demand. "That said, the falling real rate and FX support has dampened demand for Malaysian bonds recently," he said.

Malaysia's A- and A3 ratings by the top three global rating agencies put it several notches above peers such as Indonesia, the Philippines and Thailand. Its bonds are also part of major emerging market bond indices, such as Citigroup's and JPMorgan's, that investors use as benchmarks.

With 10-year yields at 3.8 per cent, Malaysian bonds offer only about 100 basis points more than Korean bonds and less than half the yield on similar tenor Indonesian bonds.

Yet, the ringgit has proved less prone to volatile swings than the won or rupiah. "We expect the fund flows from Japan to continue as the large pension funds in Japan are looking to increase their allocation to offshore investments," said Esther Teo, Affin Hwang Asset Management Bhd's head of fixed income.

Teo estimates Japanese investors bought 11 billion yen worth of Malaysian bonds in August alone, even higher than the 10.6 billion they bought in all of 2013.

Data for September is not available yet, but analysts suspect the flows would have slowed as the US dollar rallied. The ringgit is now flat versus the dollar for the year but its 2.7 per cent decline in the past three months is a cause for worry, given how much that loss eats into the bond yield.

This week's volatility in markets, spurred by worries over global growth, would be further reason for investors to re-assess their emerging market investments. REUTERS