Business

Saturday October 24, 2009

Malaysian Bond Market


THE Budget is upon us once again. At the time of writing this article, Prime Minister Datuk Seri Najib Tun Razak had yet to unveil Budget 2010.

The market also awaits the release of the September Consumer Price Index, which the Government had postponed by two days to coincide with the budget announcement.

It is widely expected that we will continue to see disinflation with consensus estimates predicting last month’s inflation rate to have fallen by 2.0% year-on-year (y-o-y) (August: minus 2.4% y-o-y).

For the local bond market, Budget 2010 will be significant in terms of the Government’s ability to consolidate its fiscal position.

This comes after the earlier official forecast for a budget deficit of 7.6% in 2009, the highest since 1987, as a result of the record stimulus packages worth a combined RM67bil.

Pre-crisis under Budget 2009, the Government had originally targeted to rein in the fiscal deficit to 3.9% of GDP in 2009 from 4.8% in 2008.

That said, we still hold the view that the current environment favours private debt securities (PDS) more than Malaysian Government Securities (MGS).

Other than supply, we may see rising interest-rate pressure next year once regional rate-hikes pick up steam. This would hit MGS more than PDS as the former is the most sensitive to interest rate movements.

Meanwhile, positive sentiment on MGS due to lower supply would also benefit PDS as the current benign interest rate environment (positive for bonds) could be extended.

Demand for PDS would remain robust due to its significant yield enhancement over cash yields. Despite rising supply – we estimate PDS and government guaranteed (GG) issuances to exceed RM50bil this year – primary issuances have been well-absorbed, thanks to strong demand.

In fact, primary issues totalling RM39.6bil for the first nine months have done well so far, with yields shedding some 30 bps post-issuance.

Issuance to date has been dominated by AAA or GG issues, many of them pump-priming related. We expect such trend to continue into 2010, judging from pipelines of major issues like Pengurusan Aset Air Bhd’s RM20bil bond facility to fund the water industry’s restructuring, private finance initiatives-related issuances (for example, the RM10bil Bakun cable project), and bond insurer Danajamin-related issuances, etc.

With supply increasingly shifting to the GG and AAA segments, we see rising scarcity of lower-rated PDS.

The impending partial buyback of Binariang GSM (AA3) bonds from the market following the expected re-listing of Maxis in the fourth quarter 2009 will further trim the availability and boost the scarcity value of high yielding PDS.

Up to Thursday, RM3.8bil trades were recorded in the MGS/GII market with a daily average of RM945mil. From the previous Friday, the 2-year benchmark MGS’2/12 dipped 2 bps to 2.78% while the 3-year benchmark MGS’8/12 closed higher by 1 bp at 2.92%.

Meanwhile, the 5-year benchmark MGS’2/15 moved down 5 bps to 3.86% and the 10-year benchmark MGS’11/19 shed 4 bps to 4.23%.

On a related note, the issue size for the new 10.5-year GII’04/20 has been announced at RM3.5bil.

Daily average trade volume in the PDS market stood at RM145mil. Slightly more than a third of all trades were from within the AAA segment and another 50% were from the AA segment.

Selling momentum was seen for Rantau (AAA) tranches maturing in 2011-2015 with yields rising by up to 15 bps on RM60mil trades done.

Sentiments on Binariang (AA3) 13 and 14 closed mixed with yields closing 7 bps down and 7 bps up respectively with RM59mil changing hands.

MYR Interest Rate Swap (IRS)

MYR IRS rates declined from the year’s high after frenzy paying in the previous week as market players took the opportunity to lock in profits from the sharp rise.

The projected size of the budget deficit is expected to set the tune for the direction of rates next week. Overall, the yield curve ended the week by circa 2-8 bps lower.

US Treasury (UST)

UST yields closed mostly lower during the week on weaker-than-expected housing starts and wholesale prices data, signalling that the economic recovery will be more gradual than expected.

As at market close on Thursday, the yield curve steepened at the short-end with the 2-year yield dipping 2 bps from the previous Friday to 0.94%, while the 5-year yield went up 1 bp to 2.36%. The 10-year yield closed unchanged at 3.42% and the 30-year yield moved lower 1 bp to 4.24%.

Foreign Exchange Market

The US dollar continues its steady 7-month decline against major currencies this week. As investors’ risk sentiment remains healthy and US interest rates remain low, the US dollar’s weakness is expected to persist.

A weak dollar and persistent reserve diversification interest from Central Banks kept euro on its uptrend while the pound sterling made steady recovery in the current weak dollar environment.

Unless global risk appetite plunges or US interest rate hike hopes inflate, both the euro and pound sterling will remain well supported.

The US dollar/ringgit consolidated within a range of 3.3550-3.4080 this week. Prevailing US dollar weakness against major currencies suggests underlying bias is still tilted to the downside for US dollar/ringgit.

l For enquiries, please contact:


fu-yew-sun@ambankgroup.com


karen-wan@ambankgroup.com


ng-juan-hui@ambankgroup.com


kuek-wee-yong@ambankgroup.com

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