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Bond-ing time for Bursa Malaysia
Jan 08, 2024
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According to statistics from Bursa Malaysia, the total market capitalisation of all listed equities stood at RM1.8 trillion, while the Malaysian bond market surpassed the RM2 trillion mark, with total issuance outstanding at RM2.02 trillion as at the end of last year, based on total outstanding values of all fixed-income securities.
For the equity market, the total value traded last year stood at about RM560bil, or approximately RM46.6bil per month, while for the bond market, excluding Bank Negara bills, Malaysian treasury bills and government housing sukuk papers, a total of RM1.82 trillion worth of papers changed hands in the first 11 months of 2023, or approximately RM165.5bil per month.
However, as the government-issued papers are widely traded and liquid, it is not a surprise that approximately 85% of monthly traded bond papers were related to public bond issuance, while the privately issued conventional and sukuk papers had a traded value of just about RM24.3bil per month, of which 91% were sukuk papers.
Hence, while the fixed-income market is approximately 12% larger in size in terms of market value, the traded value of bonds in the fixed-income market is far superior, averaging at about 3.2 times more than the value of stocks traded on Bursa Malaysia.
Who trades bonds?
Short answer, institutions. This is mainly due to the nature of the fixed-income market itself where each market lot is at RM5mil in nominal value.
Institutions here are mainly pension funds, insurance companies, other financial institutions, asset-management companies, and even selected corporations.
By nature, retail investors are seen to be off-limits as far as the fixed-income market is concerned due to the large tradeable lot size. However, there are private bankers out there who have been offering a smaller odd lot size for high net-worth individuals and these are generally in the multiples of RM250,000 per odd lot.
Regulators noted this high barrier of entry for retail investors and the Securities Commission launched Guidelines on Seasoned Corporate Bonds and Sukuk, which effectively allowed retail investors to purchase exchange-traded bonds and sukuk (ETBS) via Bursa Malaysia.
However, there are certain conditions imposed on these bonds as the term “seasoned corporate bonds and sukuk” means that these papers have been issued to sophisticated investors and are eligible to be distributed to retail investors after the seasoning period.
The seasoning period is defined as, in the case of a one-off issuance, a period of 12 months from the date the papers were issued to sophisticated investors; or in the case of a tranche under a debt or sukuk programme, a period of 12 months from the issuance of that tranche to sophisticated investors.
So, in essence, new papers via primary issuance do not make their way directly to Bursa Malaysia, and hence, disallowing retail investors to have the first bite of the cherry.
Despite the regulatory guidance, Bursa Malaysia has not been a preferred exchange for bonds as presently there are only two papers that are traded in the market – Ihsan Sukuk-ETBS 4.6%0824 and Danainfra Nasional-ETBS 4.58%1028. Two other Danainfra Nasional-ETBS, which were previously listed, have matured.
ETBS traded on Bursa Malaysia are unique as the board lot size for each is only 10 units each and with a face value of RM100 each, these papers allow retail investors to purchase them directly at a minimal entry level of RM1,000 per transaction, assuming the papers trade at its original par value.
Retail investors also have another option to purchase bonds indirectly in the market and this is via the ABF Malaysia Bond Index Fund Exchange Traded Fund (ETF) which had a net asset value of RM1.43bil as at the end of 2023.
While both ETBS allows retail investors to participate in the bond market directly and the ETF indirectly, it is rather sad that trading volume on these three instruments is super thin, making the efforts to have them listed and giving retail investors the option to diversify away from pure equity exposure rather moot.
However, retail investors do have another option to have a fixed-income market exposure, that is, via the multiple offerings from asset management companies who offer bond funds to investors.
Here, while the entry-level is affordable in terms of bite-size, it is an indirect exposure to the bond market and retail investors are only pooling their resources together under a fund, managed by a fund manager appointed by the asset management company.
However, in this scenario, retail investors are also subject to management and sales fees, which can be rather substantial. Another option for retail investors is buying bonds directly via one online platform which offers not only Malaysian bonds in ringgit but also other fixed-income securities in other major currencies too.
Online offering
The online platform is reasonably priced in terms of processing fees at 0.5% of the nominal value for Malaysian corporate bonds transacted, subject to a minimum of RM8.80 per transaction.
For local government bonds, the fees are even lower, at just 0.1% of the nominal value, subject to the same minimum amount per transaction. The online offering also charges platform fees at the rate of 0.045% and 0.02% per quarter for corporate and government bonds respectively.
While this option is available to investors the opaque nature of the bonds that are priced in the online platform is not transparent enough in terms of bid and ask price/yield.
In Malaysia, regulators have been at the forefront in introducing new platforms for better market understanding of financial products as well as markets.
For the fixed-income market, the Bond and Sukuk Information Exchange is now an established platform that provides in-depth data and all types of conventional bonds and sukuk papers.
However, it falls short of providing a platform for investors to trade the fixed-income market. For the fixed-income market players, there is also Bond Pricing Agency Malaysia, which provides daily, end-of-day evaluated prices for the Malaysian fixed-income market. But again, it is not a platform that allows trading to be carried out.
In Malaysia, the current fixed-income trading mechanism among institutional investors is rather opaque as it is still carried out over-the-counter, and the bid/ask price/yield can vary between different investment banks offering fixed-income products.
While market players have learnt to adopt the nature of the market itself in their investment strategy, what better way to have greater transparency than if these public and private bonds are offered via a recognisable exchange like Bursa Malaysia?
This will allow market players to have access to real-time information, similar to stocks, and the trading lots can be made more affordable, similar to the current trading mechanism for ETBS.
By offering bond investment and trading platform, Bursa Malaysia will join hands with other bourses that offer similar products to all investors, such as those in the Hong Kong Stock Exchange, London Stock Exchange, Shanghai Stock Exchange, Jakarta Stock Exchange, or even down south, the Singapore Stock Exchange, and thus widening the product offerings available via Bursa Malaysia.
Perhaps the regulators could explore the possibilities of having an integrated platform that will give investors all they need to understand fixed-income instruments, pricing, valuation, and of course, trading, to allow a wider market reach and greater transparency.
Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.
Source: Bond-ing time for Bursa Malaysia (2024, 06 January). The Star. Retrieved from https://www.thestar.com.my/business/insight/2024/01/06/bond-ing-time-for-bursa-malaysia
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.
The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
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