Tuesday, April 12, 2011

Malaysia Fixed Income Market Review, 3 - 8 April 2011

Fixed Income
Buying was seen particularly focussed on the short-tenured, both benchmark and off-the-run during the week. Consequently, the Malaysian Government Securities (MGS) yield curve bullish steepened as the 3-year benchmark Malaysian Government Securities (MGS) yield fell 12 basis points (bps) WoW to close at 3.35%, while the 10-year fell 2bps to 4.09%. The MGS market was also likely to be supported by foreign buying with the ringgit appreciating by 0.4% WoW to close at a record low of RM3.0165/US$, on 8 April 2011. Meanwhile, the 5-year and 7-year fell by 2bps and 3bps respectively to 3.62% and 3.82%.

On economic front, exports for February 2011 surprisingly grew by 10.69% year-on-year (YoY) from 3.0% in January 2011, while imports sustained double-digit growth as it rose by 11.5% YoY. The export surge was largely contributed by higher demand from China and Hong Kong as well as Japan during the month. However, on a month-on-month basis, exports and imports contracted by 5.5% and 12.6% respectively due to the short working month for Chinese New Year holidays in February.

For local private debt securities (PDS) market, trading was dominated by AA-rated papers, which are largely bank subordinated debts and followed by AAA-rated bonds. Meanwhile, the PDS credit outlook was dampened by a massive 8 negative rating actions. The focus was on the 7 Selangor water concessionaires, which the water bonds were downgraded by Malaysian Rating Corporation (MARC), pending unresolved restructuring in negotiations between the Selangor government, Federal Government and the water concessionaires which heighten default risks. Meanwhile, there was a downgrade on a brick manufacturing company which defaulted on profit payment .

Fixed Income Outlook
On local macroeconomics, we have started to see some slowdown in economy but it should remain sustainable as domestic consumption and private investment are still expected to drive our economic growth. Meanwhile, inflationary fears for most emerging countries are seen tapering off. However, for Malaysia, there were renewed inflationary concerns with the latest Consumer Price Index (CPI) number surprising consensus and after indication from central bank’s 2011 Annual Report being wary of greater inflationary pressure in the medium term. We expect continual inflationary concerns on the back of further subsidy rationalization by the government.

Following the last hawkish Monetary Policy Committee (MPC) statement and coupled with the higher-than-expected CPI data for February, many economists view the MPC statement as a signal that central bank may resume rate normalization in the next upcoming MPC meeting in May. 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. We think the 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, ample liquidity in the market may continue to lend support to the new supplies.

Meanwhile, foreign holdings in MGS and short-term Bills remained high. This offers some confidence to the market that current sentiment remains supportive of ringgit assets. However, suspicion over potential reversal of capital flows are likely to constantly cloud the market sentiment. On the above backdrop, we expect local MGS market to remain volatile.

For corporate bond market however, we maintain our view that credit market will be supported in conjunction with economy recovery. We expect companies to continue to report improvement in balance sheets and cash flow positions going forward. 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 issuances is showing otherwise. Unless and until we see influx of corporate bond issuances that warrant supply concerns, we expect the current demand for credit will be sufficient to support the new issuances due to pent up demand. Last but not least, rising risk appetite in tandem with positive credit outlook should continue to encourage investors to move down the credit curve in search for value .

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


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

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