Wednesday, January 4, 2012

Malaysia Fixed Income Market Review, 27 - 30 December 2011

Fixed Income
Malaysian Government Securities (MGS) extended gains for another week on lingering concern over Europe debt crisis. Gains were led by the 7-year benchmark MGS with yields falling by 5 basis points (bps) WoW to 3.49%, followed by 3-year benchmark with yields falling by 3bps WoW to 2.98%. Meanwhile, the 5- and 10-year benchmark yields closed lower by 1 basis point and 2 bps respectively, at 3.22% and 3.69%. Of note, trading volume of short-term bills surged to RM11 billion despite the 4-day trading week amid weaker Ringgit, which was spotted at RM3.168/USD on 30 December versus RM3.1558/USD on 23 December.

For Private Debt Securities (PDS) market, trading interests continued to focus on the AA-rated papers, mainly the finance-related names.

Fixed Income Outlook
Eurozone developments as well as economic data releases will continue to influence the direction of the global financial markets as well as the local bond market. Given the uncertainties in the ongoing external headwinds, some are arguing for potential easing in the first Monetary Policy Committee (MPC) meeting of 2012 in January. On contrary, we opine the central bank might continue to maintain the current interest rate level while keeping a close watch on how the external headwinds will manifest itself in near future.

Meanwhile, the much anticipated MGS/Government Investment Issue (GII) Auction Calendar was officially released. There will be a total of 28 tenders with zero private placements (PP), which is comparatively more than the previous 21 tenders held and 8 PP last year. Given that MGS/GII issuances is skewed towards mid-to-longer tenures focusing at 7-years and beyond, we expect long-term investors such as the pension funds and insurance companies will continue to support the government bond market.

For credit market, we expect the local corporate bond market to remain resilient in near to medium term on the back of sustainable liquidity in the local market. Having said that, we acknowledge the stretched pricing by historical valuation for some of the high-grade names. We also do not discount any risk-aversion triggered by heightened fear of a collapse of the global economy set off by the break-out of the Eurozone.

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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