The Malaysian bond market grew 4.5% from 1.12 trillion ringgit (US$252 billion) in 2015 to close at 1.17 trillion ringgit at the end of 2016. Malaysia thus continued to maintain its position as the third largest local currency bond market as a percentage of GDP in Asia, after Japan and South Korea.

A Securities Commission Malaysia report says corporate bond and sukuk issuances amounted to 85.7 billion ringgit, which was slightly lower than 86.35 billion ringgit in 2015. The total corporate sukuk outstanding rose 8.9% to 393.5 billion ringgit during the period.

In terms of issuance, corporate sukuk represented 75.68% of the total corporate bond and sukuk issuances in 2016, up from 66.67% in the previous year. Overall, the sukuk issuances by the government and the corporate sector accounted for 53.81% of the overall bond volume in 2016, whereas the total sukuk outstanding represented 56.36% of the total bond outstanding, compared with 54.05% in 2015.The bond market opened the year on a positive note as the decision by Bank Negara Malaysia to cut the statutory reserve requirement fueled a decline in bond yields, particularly the 10-year Malaysian government securities (MGS).

Amid the lower expectations of a US Federal Reserve rate hike and an unexpected policy rate cut by Bank Negara at the start of the third quarter, the bond market saw increased buying interest and a fall in yields across all tenors.

However, this downward trend in yields was reversed amid a global bond sell-off in November over expectations of reflation of the US economy and the subsequent Fed rate hike at year-end.

Meanwhile, against a stronger US dollar and higher US treasury rates, foreign holdings in domestic bonds eased in line with regional peers in the fourth quarter. Foreign outflows were, however, relatively well-absorbed by strong domestic liquidity.

Despite the sell-down towards the end of the year, the total foreign ownership of domestic bonds increased to 215.6 billion ringgit in December 2016 from 214.8 billion ringgit a year earlier – or 18.4% of the total bonds outstanding.

Foreign holdings in MGS remained fairly stable, representing 47.1% of the total MGS outstanding as at end-December 2016, reflecting the investors’ long-term positive outlook in Malaysia.

In line with the wider bond market, foreign ownership in corporate bonds remained mostly concentrated on AAA-rated paper, ranging from mid to long-term tenors. The maturity profile of local corporate bond issuances shortened for the year due to higher demand for more liquid paper in the face of uncertain market conditions.