Wednesday, July 27, 2011

Malaysia Fixed Income Market Review, 17-23 July 2011

Fixed Income
During the week under review, trading in the local government securities saw thinner volumes as players stayed on the sideline ahead of June’s Consumer Price Index (CPI) data release and details of upcoming 10-year Government Investment Issue (GII) reopening. Profit -taking across all benchmark tenures emerged since Wednesday with focus on the 5-year benchmark Malaysian Government Securities (MGS) as well as both MGS and GII of 10-year tenure. On a WoW basis, 3-year benchmark MGS yield closed 3 basis points (bps) higher to 3.27%, while 5-year climbed 1bp to 3.51%. Both 7- and 10-year benchmark MGS yields increased by 2bps to close at 3.70% and 3.89% respectively on Friday.

On inflation, CPI accelerated to a 37-month high of 3.5% year-on-year (YoY) in June 2011 (May 2011: 3.3% YoY) but was slightly lower than consensus’ estimates of 3.6%. The increase in price was attributed to increasing food, clothing and housing, utilities and fuel prices. Of note, the upcoming 10-year GII reopening was announced with an issue size of RM4 billion.

Mirroring trading momentum of the local government securities, local private debt securities (PDS) market experienced the same fate. Trading interest continued to focus on AA-segment, which was mainly from the banking sector. This was followed by AAA/Government guaranteed segment.

Fixed Income Outlook
On local macroeconomics, we continue to expect domestic economic growth to remain sustainable driven by private investment and domestic consumption on the back of gradual implementation of the Economic Transformation Programme (ETP) and low unemployment rate of 3%.

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, despite the recent more active primary issuances in the pipelines, the supply has been well-received due to pent-up demand over the last few years. 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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