Oct 2010 Monetary Conditions Update

Fascinating things going on in the monetary side of the economy, though you won’t know it from the money supply data (log annual and monthly changes; seasonally adjusted):

There’s been a pick up in monthly M2 growth, but not to levels I’d be overly concerned about. It’s mainly a reflection of slightly higher monthly loan growth, which is a little higher than average but still within a “normal”  range (log annual and monthly changes):

I’ll cover what’s going on in the banking system in another post – some long term trends need explaining, and I want to concentrate on short term monetary conditions in this post.

The interesting stuff is happening as usual in prices, not quantums. I wouldn’t say I’ve got a complete handle on what’s going on, so you should look at the following as an informed guess, rather than anything definitive.

There were some upticks in the interbank market and in the discount rates for TBills and BNM Bills. That last is not too surprising given the higher OPR and especially the sterilisation of BNM’s forex intervention, which requires the issuance of securities to mop up the additional Ringgit created. In fact, October’s net issuance of BNM Bills established an all time record of RM18.6 billion (RM millions):

Together with more than RM6.6 billion of MGS issuance, that meant the capital and interbank markets were heavily tapped for funds in October. Which brings me to MGS yields (percent):

Yields rose across the board in October, quite against the trend over the past year, but mainly at the medium tenures. I’m inclined to attribute this to an increase in supply rather than weakening demand – with the massive increase in BNM bills and two tranches of MGS issuance (2nd highest month this year), there’s more than enough reason for dealers to want to be compensated for bidding with higher yields.

Certainly foreigners aren’t too picky about picking up Malaysian debt securities (RM millions):

About half the net increase in BNM Bills and two-thirds of the net increase in MGS were picked up by foreign investors (private debt securities form a little over a tenth of the total in the chart above).

Now, this obviously adds quite a bit of risk to the bond markets, especially if the global economy runs into more trouble. As we’ve seen over the past month, any threat to global economic growth or financial market stability triggers risk aversion, which benefits the USD and could undermine asset prices in emerging markets. While the local market is deep enough to manage an outflow of foreign capital, it does mean that yields might spike which would make borrowing more expensive – not just for the government but everybody else.

On the other hand, we are starting from a low base – while not quite at historical lows, medium-to-long terms yields are below their pre-recession levels. I’ll try to cover this topic in more detail in a future post.

Technical Notes:

Data are from BNM’s Oct 2010 Monthly Statistical Bulletin