Thursday, May 5, 2011

Malaysia Fixed Income Market Review, 24 - 30 April 2011

Fixed Income
The Malaysian Government Securities (MGS) market ended on a stronger note during the week as currency play theme continued with ringgit appreciating by 1.5% week-on-week (WoW) to close at another record low of RM2.961/US$ on Friday. The US Fed’s pledge to keep US interest rates near zero at the recently concluded FOMC meeting will further boost the demand for higher yielding emerging market assets. Bargain hunting especially at the longer-end flattened the MGS yield curve as yield on the 10-year benchmark MGS were traded down to 4.04 14 basis points (bps) to 3.97% while the 3-year benchmark MGS fell 2bps to 3.29%. Meanwhile, the 5-year benchmark MGS also fell by 2bps, to close at 3.55% and the 7-year benchmark MGS plunged 7bps to 3.72%.

As for the new RM3.5 billion 10-year Government Issue Investment (GII), the auction on Wednesday was well received, garnering a strong bid-to-cover of 3.03 times at an average yield of 4.17%. The when-issue was trading at the range of 4.15-4.21% during the week before closing at 4.13% on Friday.

For local private debt securities (PDS) market, trading continued to focus on AAA- and AA-rated bonds.

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, Consumer Price Index (CPI) numbers have been gradually climbing up. The central bank’s 2011 Annual Report also highlighted greater inflationary pressure in the medium term. While the numbers may remain benign compared to regional peers, further subsidy rationalization by the government remains a swing factor for any significant change in the inflation outlook, thus more intensified inflationary concerns in the local context.

Following the slightly higher March CPI figure, players’ view on Overnight Policy Rate (OPR) are now split in their anticipation 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 valuation especially the popular high-grade names to remain stretched due to insufficient supply with significant pent up demand for yields .

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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