Wednesday, May 25, 2011

Malaysia Fixed Income Market Review, 15 - 21 May 2011

Fixed Income
Benchmark Malaysian Government Securities (MGS) yields were range-bound during the week. Most players were seen staying at the sidelines ahead of April’s Consumer Price Index (CPI) and 1Q2011 Gross Domestic Product (GDP) data releases. The 5- and 10-year benchmark MGS yields both closed 1 basis point higher at 3.54% and 3.99% respectively, while 7-year yield closed 2 basis points (bps) higher to settle at 3.76%. However, the shorter-end remains supported, with the 3-year yield closed unchanged at 3.28%.

On Wednesday evening, both CPI and GDP results were released. The Malaysian economy printed a 4.6% year-on-year (YoY) growth in the 1Q2011, lower than economists’ consensus of 4.9%. Overall domestic growth was supported by higher private sector spending and stronger regional demand for commodities as well as non-electrical and electronic exports. Inflation accelerated further, with April CPI coming in at 3.2% YoY, above market consensus of 3.1%. Meanwhile, Domestic Trade, Cooperative and Consumerism Minister Datuk Seri Ismail Sabri Yaacob commented that there will be a review for prices for all petroleum products including RON95 in June.

For local private debt securities (PDS) market, trading continued to focus on AAA- and AA-rated bonds. Investors mainly took opportunity to do some mark-to-market trades. Selected PDS names were dealt weaker on expectation that MGS yields will move higher in the coming weeks, where some investors were seen bargain-hunting along the AAA and AA segments.

Fixed Income Outlook
On local macroeconomics, we expect economy to remain sustainable albeit some slow down in momentum evidenced by the latest economic data. Domestic consumption and private investment are expected to continue to drive the economy growth. CPI numbers have been gradually climbing up. Nonetheless, further subsidy rationalization by the government remains a swing factor for any significant change in the inflation outlook.

Following Bank Negara Malaysia (BNM)’s move to resume interest rate normalization by another 25bps, we expect the central bank to continue to increase Overnight Policy Rate (OPR) by another 25 – 50bps in 2H with timing subject to the central bank’s assessment of growth and inflation outlook. The latest Monetary Policy statement reiterated higher downside risk to global recovery while domestic economy remains firmly on steady growth path, and upward pressure on prices driven by high commodity and energy prices as well as signs of demand-pull factors.

On supply and demand dynamics, the much anticipated Government related papers on the back of public or private funding needs arising from mega projects announced under the Economic Transformation Programme (ETP) have not been materialized. Further delay will widen the current supply demand gap given liquidity remain ample in the local financial market. On this backdrop, yields movements may be capped despite we are in a rate hike cycle.

In terms of foreign participation, current sentiment and currency outlook remain favorable. Nonetheless, the record high holding by the offshore investors present risks should the reverse occurs. We expect intensified suspicion of momentous reversal of capital flows on any signs of change in sentiment and waning Asian currency theme, especially in the current volatile external environment.

For corporate bond market, we maintain our view that credit fundamentals in general should continue to improve. However, the credit market has been driven much by the ample liquidity with less than expected new supplies. We expect the current valuation especially the popular high-grade names to remain stretched due to insufficient supply with significant pent up demand for yields .

Fixed Income Strategy
We maintain our slight underweight duration call across all fixed income assets. In terms of asset allocation, focus remains on corporate bonds. We continue to like banking sector supported by the overall well capitalized domestic banking system with healthy asset quality and sustainable loan growth.

We aim to participate in new issuances for further diversification and yield enhancement. Last but not least, we look to trade MGS on high conviction.

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

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