Tuesday, July 19, 2011

Malaysia Fixed Income Market Review, 10-16 July 2011

Fixed Income
Malaysian Government Securities (MGS) momentum strengthened to the highest weekly volume since March 2011 during the week under review, driven by safe-haven flows on concern of an easing recovery in the global and local economy. Bargain hunting in the mid- to long-tenured benchmarks continued to flatten the benchmark MGS yield curve as the 3-year benchmark MGS yield declined by 1 basis point (bps) to 3.24%, while the 10-year yield plunged 5bps to 3.87%. Meanwhile, the 5-year benchmark MGS moved down by 4bps to 3.50% and 7-year fell by 3bps to 3.68%. During midweek, the reopening of RM4.0 billion 5-year benchmark MGS registered a moderate bid-to-cover ratio of 2.1x against the year-to-date average of 2.2x. Meanwhile, the reopening drew a slightly lower average yield of 3.518%.

On economic front, Malaysia’s May 2011 Industrial Production Index (IPI) decreased for a second month by -5.1% year-on-year (YoY). The declining IPI in May was mainly attributed to the moderating exports growth and industry wise, it was dragged by mining sector’s output which was recorded at -20.1% YoY following a dropped of 6.9% in April 2011.

For local private debt securities (PDS) market, the momentum continued to be driven by AA-segment which was mainly from the power sector.

Fixed Income Outlook
On macroeconomics, economic indicators in the U.S. have brought general consensus that recovery is expected to be slow and patchy going forward. With the renewed fears on possible spreading of Europe’s debt and non-raising of U.S. debt ceiling, buying of U.S. Treasuries pushed yields lower across the curve. Locally, there were no change in fundamentals and we expect domestic economic growth to remain sustainable driven by private investment and domestic consumption.

On inflationary concerns, with renewed speculation of an earlier General Election, subsidy cut is expected to be gradual and hence, capping consumer price index (CPI) numbers for the rest of the year.

On interest rate stance, despite Bank Negara Malaysia’s (BNM) recent pause in interest rate normalization, we maintain our view that BNM will likely resume Overnight Policy Rate (OPR) increase by another 25-50bps in 2H11 with timing subject to the central bank’s assessment on evolving economic conditions and to the extent that the growth momentum is sustained.

On supply and demand dynamics, as industry sources hint that more issuances will come on stream in the 2H11, we are recently seeing primary issuances in the pipelines. This should help close the existing supply demand gap while ample liquidity and continual demand from pension and insurance funds will continue to lend support to the local market. Meanwhile, continuous record high holding by the offshore investors do present risks should the reverse occurs.

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 aim to participate in new issuances for further diversification and yield enhancement.

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

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