Wednesday, April 27, 2011

Malaysia Fixed Income Market Review, 18 - 24 April 2011

Fixed Income
During the week, the Malaysian Government Securities (MGS) yield curve steepened as active trading was seen at the short-end and belly of the curve, supported by some foreign buying as ringgit appreciated by 0.6% week-on-week to close at a record low of RM3.0054/US$ on Friday. As a result, the 3-year benchmark MGS shed 4 basis points (bps) from the previous Friday to close at 3.31%. Meanwhile, yields on the 5- and 10-year MGS benchmarks rose 1bp and 4bps respectively to close at 3.57% and 4.11%. In contrast, the 7-year benchmark MGS remained stable at 3.79%.

On Thursday, details of the new RM3.5 billion 10-year Government Investment Issue (GII) was announced by Bank Negara Malaysia (BNM), scheduled to be auctioned on 27 April 2011. The when-issue was dealt at a tight range of 4.19-4.22% on Thursday and Friday. On the economic front, Consumer Price Index (CPI) accelerated to 3.0% year-onyear in March 2011 from 2.9% in February 2011. The CPI continued to be mainly driven by high cost of food and beverages, as well as transport.

For local private debt securities (PDS) market, trading was focused on AAA-rated papers, followed by AA-rated bonds which are mainly banking and power-related papers.

Fixed Income Outlook
On local macroeconomics, the economy should remain sustainable as domestic consumption and private investment are expected to continue to drive our economic growth. Meanwhile, there were renewed inflationary concerns in Malaysia with Consumer Price Index (CPI) numbers gradually climbing and after indication from central bank’s 2011 Annual Report being wary of greater inflationary pressure in the medium term. We expect inflationary concerns to persist, subject to further subsidy rationalization by the government.

Following the slightly higher March CPI figure, players’ view on Overnight Policy Rate (OPR) are now split in their anticipation on whether Bank Negara will hike its benchmark OPR at next month’s Monetary Policy Committee (MPC) meeting. We reiterate our view that BNM will at most increase OPR by another 50-75bps from the current 2.75% this year, with likelihood of bringing the rate increase in 2Q11.

On supply and demand dynamics, market has generally expected a larger issuance size for government bonds for 2011. However, any unanticipated influx of Government Guaranteed (GG) papers and issuance size of the Private Placement for government bonds may present new supply pressure and influence direction of the bond yields. Nonetheless, any selling pressure could be limited due to ample liquidity in the market.

Meanwhile, latest data on foreign holdings in MGS and short-term Bills continue to show new inflows, proving sentiment remains supportive of local fixed income assets. Having said that, suspicion over potential reversal of capital flows are likely to constantly cloud the bond market.

For corporate bond market, we maintain our view that credit fundamentals in general should continue to improve with better cash flow and balance sheet positions in conjunction with economy recovery. While we expect to see more bond offers coming on stream in 2011 on the back of more infrastructure projects announcement by the government, the current supply of new issuance is showing otherwise. Unless and until we see influx of corporate bond issuance that warrant supply concerns, we expect the current demand for credit will be sufficient to support the new issuance due to pent up demand.

Fixed Income Strategy
Overweight corporate bonds with focus on “AA” rated bonds. Look to participate in new issuance for yield pick-up.

Source for MGS levels: Bond Pricing Agency
Source: ING Funds Berhad

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