Wednesday, January 18, 2012

Malaysia Fixed Income Market Review, 9 - 13 January 2012

Fixed Income
Malaysian Government Securities (MGS) momentum strengthened further during the week under review, led by 7- and 10-year benchmarks. Sentiment was aided by upbeat demand at the first government bond auction this year, namely the RM3.5 billion 7-year MGS which garnered a strong bid-to-cover ratio of 3.6x (last offering in September11 was at 1.7x) at an average yield of 3.415%. Buyers pushed the 7-year and 10-year MGS yields lower by 11 basis points (bps) and 9bps week-on-week (WoW) to close at 3.38% and 3.60% accordingly. In contrast, the 3-year benchmark yield stayed unchanged at 3.01%, while the 5-year benchmark yield increased by 2bps WoW to settle at 3.22%.

On local economic front, exports moderated more than expected to +8.0% year-on year (YoY) in November11 from a revised +15.4% increase in October 2011, as sales of Electrical & Electronic (E&E) goods to the US and Thailand fell. On the other hand, the November 2011 imports climbed less than expected, by +8.4% YoY, beating the prior month’s revised +4.0%. Meanwhile, the November 2011 industrial production unexpectedly eased to +1.8% YoY, after climbing a revised 2.9% in October 2011, as mining contracted and manufacturing growth eased. In contrast, the month-on-month (MoM) industrial production retreated by -4.6% in November 2011 compared to the previous month’s +2.9%.

For Private Debt Securities (PDS) market, higher trading volume was recorded during the week mainly due to a sizeable toll-related primary issuance amounting to RM23.35 billion (AAA-rated) and RM11.0 billion (Government-Guaranteed) respectively making its debut last week. In the AA-segment, buying interest continued to be seen in financial institution bonds and followed by power bonds.

Fixed Income Outlook
Amid the continual debt crisis and sovereign rating downgrades in the Eurozone, local market will be focusing on the upcoming Monetary Policy Committee meeting on 31January 2012. Our take is that the Central bank will likely to keep rate unchanged while continue to assess development of the external factors including the growth prospect of the developed economies.

Meanwhile, we expect next week will be relatively quiet due to Chinese New Year break and the next government bond auction will be in February. Given the absence of Private Placement, the 1st 7-year MGS had garnered strong response from the market. We may continue to see stronger bid-to-cover ratio for the auctions this year compared to 2011.

Movement in Ringgit and a greater Asian growth theme will continue to influence the direction of foreign participation in the local government bond market.

On credit market, investors will continue to look for yield with a cautious mode given the softening growth prospect.

Fixed Income Strategy
We remain 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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