Thursday, September 15, 2011

Malaysia Fixed Income Market Review, 4 - 10 September 2011

Fixed Income
Strong Malaysian Government Securities (MGS) trade volume resumed as the market returned to a full trading week, after the long mid-week holidays in the previous week. As investors’ fear of global recession as well as the ongoing European debt crisis remain at an elevated level, the MGS continued to rally with 3-, 5- , 7- and 10-year yields shedding 9 basis points (bps), 7bps, 5bps and 3bps week-on-week (WoW), respectively to close at 3.02%, 3.26% 3.46% and 3.57%. Meanwhile, the MGS yield curve steepened as the 3-year benchmark yield plunged more than the 10-year benchmark, following the pared down expectations of any further rate hike.

As widely expected, the Monetary Policy Committee (MPC) maintained the Overnight Policy Rate (OPR) and Statutory Reserve Requirement (SRR) at 3.00% and 4.00% respectively on 8 September. In the MPC statement, BNM highlighted the continual assessment of evolving developments surrounding inflation and the economy, in determining interest rate stance to ensure Malaysian economy growth sustainability. At the same time, Malaysia’s exports moderated to 7.1% year-on-year (YoY) in July 2011 after picking up at 9.6% In June 2011, due to a sharper decline in the exports of electronic & electrical products on the back of a slowing global demand. The Industrial Production Index (IPI) also contracted by 0.6% YoY in July 2011, after a revised growth of 1.3% in June 2011, due to a slowdown in manufacturing.

For Private Debt Securities (PDS) market, trading was largely focused on “AA” papers, primarily the financial and power sectors, and followed by “AAA” papers.

Fixed Income Outlook
Amid multiple worries on faltering US economic recovery and potential fallout from the Eurozone debt crisis, the recent local numbers are pointing to moderating growth. In addition, BNM commented that the external uncertainties are affecting global confidence, and that Malaysia’s growth in 2011 may be closer to 5.0%, the lower band of the central bank’s earlier projection of 5.0 – 6.0%. With inflation
numbers having peaked in June, focus has apparently been shifted back to growth prospect. On this account, many view that BNM is now having less pressure to further raise interest rate. We do not disagree with that.

On demand-supply dynamics, we are paring down supply risks in government-related segment. It has been disappointing thus far in terms of new supplies of government-related papers despite the anticipation of more funding needs from mega projects announced under the Economic Transformation Programme (ETP). On demand side, constant buying of MGS by long-term investors such as the pension funds and insurance companies will continue to support the government bond market. On top of this, latest foreign holdings in July continued to hit record high with foreign investors holding 34% of total outstanding MGS. Given the positive demand-supply dynamics, tapering inflationary pressures, weaker economic outlook as well as expectation of a pause in interest rate normalization, bond market will continue to be well supported.

For corporate bond market, soft economic outlook may trigger risk-aversion, hurting sentiment in the credit space. Having said, it is pre-matured to conclude major deterioration in credit fundamentals. We expect investors will continue to stay away from A-rated papers. However, with the current pent-up demand and yield enhancement requirements, we expect corporate bonds to continue to hold up well. While we acknowledge the stretched valuation along the popular high-grades, any corrections in yields will be limited given the strong demand from the local players.

Fixed Income Strategy
We have revised our previous slight underweight to neutral 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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