Wednesday, January 6, 2010

The Mysterious Affair Of MGS Yields And The Maxis IPO

There was some weird happenings in November, which I'll get to in a bit. It'd makes for an interesting whodunit, if I could just get a good idea as to who the culprits are. Unfortunately I can't, so I have to settle for presenting the evidence and see if anyone has any better ideas.

First up, money supply growth shot up in November, even on a seasonally adjusted basis (log monthly changes, seasonally adjusted):

Half of the growth was driven by a jump in demand deposits, which forms roughly 4/5ths of M1 (RM millions):

Average lending rates fell 6bp (no big deal), while loan growth fell to a seasonally adjusted 0.5% m-o-m. Here's where the story gets interesting. There was a net increase in public borrowing to the tune of RM6.5 billion (i.e. an increase in supply of government bonds outstanding) specifically for 3 year and 5 year maturities, but while 3 year MGS indicative yields did indeed go up (i.e. the price fell), yields fell at every other maturity:

As there were hardly any redemptions, that ought to indicate an increase in MGS demand sufficient to not only swallow the extra RM6.5 billion but also move prices up. On top of that, you have the competition from the massive Maxis IPO which set a record for equity fund raising in Malaysia (and incidentally, explains the surge in demand deposits)(RM millions):

To make things clear, we have a downward movement in MGS yields despite an increase in MGS supply, as well as a record IPO that mopped up tons of cash. Which means that there is an awful lot of investor demand for both, to the point where nearly RM18 billion in new securities were snapped up.

The question is: where did this demand come from?

It doesn't appear to be from foreign investors, unless they did a hit and run job - while the Ringgit had a wild month (by Ringgit standards), little of the funds appear to have stuck locally. Forex volumes, bank forex deposits and BNM's international reserves didn't change much for the month.

If it's local (or locally held foreign funds), then there ought to have been some kind of shift out of other assets into MGS and Maxis. That's harder to track, though by rights there ought to have been a drop in the KLCI pre-Maxis - there wasn't. There also ought to have been a shift from other deposit types (including interbank) into demand deposits - that didn't happen either, or at least not to the point where other deposits shrank.

I'm stuck with the rather unsatisfactory speculation that there's money from Singapore accounts coming back to Malaysia - but there's no way to "officially" substantiate this.


  1. watch out for large swaps position?

  2. Aren't swap positions be captured on the balance sheet (foreign assets and liabilities)?

    If they are, my point's still valid. If they aren't, then that's one way the source of demand is being obscured.

  3. Have you read this?

    somehow, there's something wrong about that article. conflating forex reserve with capital flow maybe?

    it also says about sudden decline of monetary base. i don;t remember that. did i miss anything?

  4. LOL, I seem to remember this very same article or one very like it - in 1998. A better article covering the same report (with excerpts):

    Note the basis of calculation - % current versus 2008 peak, hence the appearance of a sharp drop.

    For base money, the guy is not referring to M1 but rather reserve money (deposits of FIs at BNM).

    In both cases, the drops were really in the last quarter of 2008, not in 2009, so all the headlines are wrong.

    I'll have a post up once I've tracked down some more info.