Wednesday, January 11, 2012

Malaysia Fixed Income Market Review, 3 - 6 January 2012

Fixed Income
Malaysian Government Securities (MGS) started the year 2012 with stronger weekly trading momentum as compared to the previous few months. This was mainly driven by continued interests in the Government Investment Issues (GIIs) and non-benchmark MGS. Meanwhile, there was profit-taking on the 3-year benchmark MGS sending the yield up by 3 basis points (bps) WoW to 3.01% as it touched a 3-week low of 2.98% previously. However, the 5-year benchmark fell by 2bps WoW to close at 3.20%. Both the 7- and 10- year benchmark remained stable at 3.49% and 3.69% respectively.

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

Fixed Income Outlook
Heightened speculations on recession in the Euro Zone amid the on-going sovereign debt crisis and protracted anemic economy outlook in the US continue to paint an unexciting global economic climate in 2012. This is coupled with further concerns of a slowing growth in China and the rest of the emerging economies. Locally, while there are domestic engines to support continual growth, external factors will remain a drag to our GDP given the significance of exports and Malaysia being an open economy.

On inflation, latest numbers suggest moderation going into 2012, in tandem with soft economic outlook as well as softer energy prices. Nonetheless, we reckon there is possibility of renewed fear on potential reinstatement of subsidy rationalization post the much speculated General Election as early as 1Q2012.

Given the above growth prospect and comfortable inflation expectation, Bank Negara Malaysia (BNM) is likely to keep interest rate stable at the current accommodative level at least for 1H2012. This is further supported by BNM’s intention to keep asset bubbles at bay. Risks to our outlook will be an unexpected dismay domestic growth and a blow-out of the external headwinds.

On demand and supply dynamics of the government bond segment, assuming an issue size of circa RM3.0 billion to RM3.5 billion for each of the 28 auctions in 2012, gross issuance may total to RM85bn – RM90bn. With total government bond maturities of RM45.56 billion, we expect the net issuance to be around RM45 billion. This is close to the net issuance of RM45.2 billion in 2011. Based on the net increase of foreign holdings in government bonds amounting to RM23 billion in 2011, a whooping 50% of the net issuance was absorbed by foreign investors. While we may not see the same quantum jump in 2012, yield differential relative to the US treasuries, the broad emerging economies theme as well as the relatively less volatile MGS may continue to be supportive of foreign participation. We also reiterate the continual demand for MGS from the local long-term insurance and pension funds.

On credit market, ample liquidity and the perpetual search for yields will continue to offer good demand for corporate bonds. However, the dim growth prospect may prevent investor to move down the credit curve and to focus on only selective non-cyclical industries. In any case, A-rated bonds in the local market have been thinly traded with limited interest for the few years.

Fixed Income Strategy
We are generally positive on local bond market given the perceived conducive environment for bond market. We continue to focus on value enhancing corporate bonds, trade on momentum when opportunities arise. Last but not least, we will continue to participate in new issuances for diversification and return enhancement.

Source for MGS levels: Bond Pricing Agency
Source: ING Funds Berhad

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