Tuesday, October 18, 2011

Malaysia Fixed Income Market Review, 9 - 15 October 2011

Fixed Income
During the week under review, the mid- to long-tenured benchmarks Malaysian Government Securities (MGS) closed range-bound whilst flows were heavier along the off-the run MGS and Government Investment Issues (GII). Meanwhile, the 3-year benchmark MGS was heavily traded amid the RM3.2 billion re-opening auction on Thursday. The re-opening auction was well received, with a bid-tocover ratio of 2.39x, at an average yield of 3.133%, settling towards the higher end of the past 5-day trading range of 3.08-3.15%. On a week-on-week basis, the 3-year benchmark MGS yield climbed 7 basis points (bps) to 3.15% while the 5-year yield added 1 basis point (bp) to 3.32% and the 10-year yield increased by 3bps to 3.71%. In contrast, the 7-year benchmark MGS yield fell by 1bp to 3.53%.

On economic front, Malaysia’s August 2011 Industrial Production Index (IPI) rebounded by +3.0% year-on-year (YoY), from -0.5% (revised) in July 2011. IPI rise more than expected as manufacturing and mining output improved.

For Private Debt Securities (PDS), the trading interest remains focused on AAA- and AA- segments, which are mostly banks and power sectors as well as quasi-government entities.

Fixed Income Outlook
Despite mixed economic data from the US, negative sentiment on the back of on-going Eurozone debt crisis and the latest growth concerns of emerging markets continue to cloud global financial markets. Volatilities were present across all asset classes, from equity to bond market to commodities.

Locally, we also witnessed a mixed bag of data in the recent months, pointing to moderating growth prospect. The central bank has been reiterating external uncertainties affecting domestic economy, although private consumption and investment should continue to drive growth for 2H of the year. Some had argued the possibility of a reversal of monetary policy where BNM may cut interest rate in
the next meeting. We reckon BNM will likely to keep OPR unchanged for the remaining year. We opine a tightening policy may be premature at this juncture despite the acknowledgement of a slower growth than previously expected.

On fiscal policy, the Budget 2012 announcement came in without much surprise. The targeted budget deficit of 5.4% of GDP in 2011 seems to be on track and government is estimating a 4.7% in 2012 based on GDP forecast of 5-6%. Given the current gloomy external outlook, the official GDP forecast seems to be too optimistic and thus could underestimate the target budget deficit for next year. This could be less positive from sovereign rating point of view with Malaysia running into its 16th year of budget deficit without strong political will to address the issue.

For the remaining government bond auctions, we expect market to be more cautious given the recent volatility triggered by global uncertainties as well as heightened fears of foreigner unwinding the record high holdings in MGS. On the other hand, given the current focus on growth and tapering inflationary, market may continue to extend duration. Coupled with our expectation of an unchanged interest rate, there may still be room for further flattening of MGS yield curve.

For corporate bond market, soft economic outlook may trigger risk-aversion, hurting sentiment in the credit space. 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 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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