Wednesday, November 30, 2011

Malaysia Fixed Income Market Review, 20 - 26 November 2011

Fixed Income
Malaysian Government Securities (MGS) trade momentum was weaker last week compared to previous week. Profit-taking activities, especially along the shorter-dated tenures reversed previous week’s gain with yields rising across the curve. This was partly due to October Consumer Price Index (CPI) number being higher than expected as well as the weakening ringgit. On a week-onweek (WoW) basis, the 3- and 5-year benchmarks yields rose by 6 and 11 basis points (bps) respectively to 3.14% and 3.30%. Meanwhile, the 10-year benchmark yield climbed 3bps to close on Friday at 3.75%.

On economic front, CPI increased by 3.4% year-on-year (YoY) in October 2011, the same pace as in September 2011 but was higher than consensus forecast of 3.3%. The increase in CPI was due to higher food and transportation costs.

For Private Debt Securities (PDS) market, interests were seen skewed towards AAA-rated papers, led by debut of a banking-related bond and a power-related bond. This was followed by interest in AA-segment, which are mainly banking, toll and power sectors.

Fixed Income Outlook
Local government bond market will continue to take hints from the development in the Eurozone and the US Treasuries in charting its direction. Meanwhile, release of the better than expected 3Q2011 Gross Domestic Product (GDP) number has rather muted
impact to the local bond market as this may signal expectation of a moderating growth prospect for the last quarter of the year. Nevertheless, given the roll-out of certain committed investments under the Economic Transformation program, coupled with healthy domestic spending, Malaysia seems to be on track to achieve the projected 5-6% growth for 2011.

There are two remaining government bond auctions for the rest of the year. We expect the last two auctions to be well received. Meanwhile, investors are waiting for the new auction calendar for 2012 to better gauge demand supply dynamics of the government bond segment for next year.

We expect corporate bond market to be well supported for the rest of the year and investors may continue to extend duration on tame inflation and stable interest rate outlook.

Fixed Income Strategy
We remain positive on local bond market in general with focus on value enhancing corporate bonds. We look 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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