Wednesday, June 1, 2011

Malaysia Fixed Income Market Review, 23 - 28 May 2011

Fixed Income
During the week under review, Malaysian Government Securities (MGS) recorded thin trading due to lack of fresh drivers. Bearish sentiment continued to cloud the MGS market, sending benchmark yields up by 1-2 basis points (bps). The 3- and 7-year benchmark MGS yields climbed 2bps to 3.30% and 3.78% respectively. Meanwhile, the 5- and 10-year benchmark MGS yields increased by 1bp to 3.55% and 4.00% respectively.

On Friday evening, the National Economic Council (NEC) has approved an increase in the electricity tariff but details will only be announced on Monday.

For local private debt securities (PDS) market, trading mix continued to focus on AAA- and AA-rated bonds. A new “AAA-rated” primary issuance of RM350 million contributed to the largest trade. This was followed by bonds from the banking, power, toll road as well as construction sectors.

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. While Consumer Price Index (CPI) numbers have been gradually climbing up, market is getting mixed signal from the news on subsidy rationalization in the last few weeks. The latest signals from the government officials being delay in petrol and diesel subsidy cuts, but approval for Tenaga National’s electricity tariff hikes via increase in gas prices.

Following Bank Negara Malaysia (BNM)’s move to resume interest rate normalization by another 25bps, we expect BNM to continue to increase OPR by another 25 – 50bps in 2H with timing subject to the central’s assessment of growth and inflation outlook. The latest Monetary Policy Committee (MPC) 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 yet to materialize. 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. 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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