Friday, October 28, 2011

Malaysia Fixed Income Market Review, 16 - 22 October 2011

Fixed Income
The Malaysian Government Securities (MGS) market was lackluster during the week under review due to lack of fresh drivers and hence, benchmark yields were range-bound. The 5- and 7-year benchmark MGS yields climbed 3 basis points (bps) and 1 bp weekon-week (WoW) respectively to 3.35% and 3.52%. The 3-year MGS yield was traded the most amongst the benchmark and remained unchanged at 3.15%. The 10-year MGS yield also remained stable at 3.71%.

On local economic front, the Consumer Price Index (CPI) surprisingly rose at a faster pace of 3.4% year-on-year (YoY) in September 2011, from 3.3% in August 2011. This was due to a faster increase in food and transportation costs, whilst a weakening ringgit of about 7% against the dollar in September caused import costs to be higher. In addition, Leading Index (LI) moderated to 1.1% YoY in August 2011, from 1.9% in June and July 2011, pointing to weaker economic activities ahead.

For Private Debt Securities (PDS) market, trading interest continued to focus on AAA- and AA- segments, which are mainly banks, plantation and power sectors as well as quasi-government entities.

Fixed Income Outlook
Amid ongoing debates and speculations on final outcome of the Eurozone debt crisis, local economic data continued to point to moderating growth prospect despite the recent higher than expected inflation numbers. We maintain our view that Bank Negara Malaysia (BNM) will likely keep interest rates unchanged in the last monetary policy meeting in November this year.

Following the announcement of target budget deficit of 4.7% and Gross Domestic Product (GDP) forecast of 5-6% in 2012, market does not seem to be too excited over the seemingly optimistic growth number forecast. Reaction in the bond market was muted despite the improving deficit numbers. We expect government market to continue to be range-bound while market awaits release of the government bond auction calendar for 2012 to gauge the term structure of the government bonds. Meanwhile, news from the Eurozone and the US data will continue to influence the local currency as well as local bond market direction.

For credit market, there have been a couple of sizeable new issuances coming to the market recently. Despite all uncertainties clouding the global financial market, these high-grade issuances received strong response from the local market. We reckon this is due to high liquidity in the market, on top of yield requirement. We expect the corporate bond market to continue to be resilient while we acknowledge that valuation is stretched. In addition, we do not discount potential risk-aversion triggered by more adverse news on the economic growth prospects.

Fixed Income Strategy
We have revised our duration call to slightly overweight from neutral duration 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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