Wednesday, August 24, 2011

Malaysia Fixed Income Market Review, 14 - 20 August 2011

Fixed Income
Safe-haven sentiment continued to drive the rally in Malaysian Government Securities (MGS) market despite lower trading volume. During the week, the 10-year benchmark Government Investment Issue (GII) and the 5-year MGS continued to top the trading list. As the 10-year GII is 12 basis points (bps) above MGS level, strong buying pushed 10-year GII yield lower by 5bps week-on-week (WoW) to 3.75% on Friday. Meanwhile, the benchmark MGS yields fell by 2-3bps WoW with 3-, 5-, 7- and 10-year closing at 3.14%, 3.38%, 3.52% and 3.63% respectively on Friday. Of note, 10-year benchmark recorded its lowest yield since March 2009 after inflation moderated and concern about slowing global economy pared down expectations of interest rate hike.

On local economic front, inflation concerns started to ease from a 27-month high of 3.5% year-on-year (YoY) in June, with the recent surprise of 3.4% YoY for the month of July versus consensus forecast of +3.6%. Easing price pressure was mainly attributed to the slower transportation price increase, which rose by +4.8% YoY (June 2011: +5.8%), while clothing and footwear prices contracted by -0.5% after rising +0.3% in June 2011. Aside, 2Q11 Gross Domestic Product (GDP) growth moderated to +4.0% YoY, from an upward revised of +4.9% YoY in 1Q11. This was due to a moderation in consumer and business spending during the quarter, disruption of components supply to the automotive industry caused by Japan’s earthquake, as well as a production problem faced by a major oil field in Malaysia.

In contrast to MGS market, Private Debt Securities (PDS) market turned active during the week under review due to pent-up demand from the local investors as the long-awaited supply to come on stream was slower than expected. Trading share was led by the “AAA” segment and followed by the “AA” segment. Meanwhile, a banking paper contributed to the typically lethargic “A” market.

Fixed Income Outlook
Outlook for 2H11 remains challenging amid signs of faltering US economic recovery and threatening Europe debt crisis to escalate to larger core Eurozone nations. Following the renewed concerns, Bank Negara Malaysia (BNM) highlighted that the external crisis are affecting global confidence and Malaysia’s growth in 2011 may be closer to 5.0%.

With easing inflation and the global and domestic economic recovery likely to be weaker than earlier expectations, it is now less pressure for Bank Negara Malaysia (BNM) to raise interest rates. On this back drop, we opine that BNM may at most increase interest rate by 25bps this year, while continue to assess the evolving economic conditions and sustainability of growth momentum.

Given the above, coupled with record high foreign holdings, the MGS yield curve is expected to remain flat in the short-term. Meanwhile, we remain cautious on potential unwinding of positions from the foreign investors should currency theme taper off.

For corporate bond market, we remain positive on credit market given the pent-up demand and yield requirement built-up over the last few years. Despite of the earlier expectation of more new issuances to come on stream in 2011 on the back of mega infrastructure projects announced by the government, however the pipelines are showing otherwise. In addition, as long as corporate issuers are able to enjoy competitive cost of financing from the banking system, they will continue to opt for the conventional bank loans instead of coming to the bond market for their funding.

Fixed Income Strategy
We maintain our slight underweight call across all Fixed Income. In terms of asset allocation, focus remains on corporate bonds. We aim 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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