Business

Saturday February 21, 2009

Malaysian Bond Market


LINGERING supply concern remains the key issue in the local bond market. During the week, Deputy Prime Minister Datuk Seri Najib Razak guided that the 3.5% gross domestic product (GDP) growth target for 2009 will be lowered. Coupled with the “much higher” second stimulus plan, this is a double-whammy for the fiscal deficit situation.

During the unveiling of the first fiscal stimulus plan, the DPM revised the overall budget deficit to RM35.9mil, or 4.8% of GDP, based on a GDP growth target of 3.5% for 2009. This implied gross and net MGS issuance of RM72bil and RM36bil. The second stimulus plan is widely expected to range from RM10bil-RM20bil. Every additional RM10bil expenditure would add circa 1.2% to the fiscal deficit figure. If lower GDP leads to lower government revenue, the fiscal gap would increase further. If the additional fiscal gap is entirely funded by MGS, net supply of MGS would rise by over RM10bil.

There are a number of mitigating factors to the supply concern. Firstly, the Government may tap into alternative funding sources; for example monetisation of government assets or more contribution from Petronas Currently, about 70% of Petronas’ profit is channelled to the Government. Secondly, PDS supply is expected to decrease sharply in 2009 due to tough fund-raising conditions, hence mitigating the overall bond supply situation Thirdly, the actual implementation of the stimulus plan, especially development expenditure, may be delayed as seen in the first stimulus plan.

The demand side does not look particularly rosy with trend of outflow of foreign funds, lower asset growth of major investors, and lower contribution to the EPF’s coffer. Hence, despite the estimated RM11bil cash released from the 200 basis points (bps) cut in statutory reserve requirement for banks, demand is unlikely to pick up significantly to absorb potentially much higher bond supply.

A significant mismatch in supply-demand situation would steepen the yield curve further due to higher capital loss sensitivity on the long-end. Hence, from a bond investor’s perspective, the current situation still calls for a cautious stance on the MGS market.

Despite the yield curve having climbed to the steepest levels since 2H05, and long-end MGS approaching historical average levels, a clear resolution of the supply-demand situation is needed before confidence returns to the market.

During the week, RM5.7bil was done in the MGS/GII market, or an average of RM1.4bil per day. Yields closed mostly higher, in the region of 2-92 bps higher from previous Friday. MGS ‘9/11 rose 29 bps to 2.90%, ‘4/14 rose 15 bps to 3.25%, ‘7/19 rose 20 bps to 4.10% while ‘9/28 spiked 92 bps from its last done early this month to 4.60%.

GII ‘6/11, ‘2/14 and ‘8/19 rose 17-20 bps each to close at 2.90%, 3.35% and 4.11% respectively. Amid uncertainty in the market, investors can find better yield-enhancement opportunities in the PDS market, especially in the double-A space where absolute yields remain at multiple-years high.

During the week, the PDS market recorded RM754mil worth of trades, or an average of RM189mil per day. 42% of the trades were done on AAA bonds, 50% on double-A bonds and 8% on single-A bonds.

In the AAA segment, trades continued to concentrate around names such as Khazanah, Cagamas and Rantau. Yields closed mostly higher on the said bonds, by 12-54 bps higher. In the double-A segment, power bonds were seen actively traded this week. Sarawak Power, TNB, YTLPG, YTLPI, GB3 and Mukah Power bonds contributed RM152mil worth of trades, or 40% of the total trades done on double-A bonds. Yields closed mostly lower on the said bonds, in the region of 5-39 bps lower.

MYR Interest Rate Swap

Weak sentiment for MGS continues to impact IRS market with the curve steepening during the week. One and two year rates remain relatively unchanged while longer-end yields inched higher by 15-25 bps. Trading was mostly on shorter tenures as market awaits direction from the 3-year MGS tender announcement and January CPI.

US Treasury Market

The US Treasuries market went on a roller-coaster ride this week. Yields dipped 10-24 bps at the start of the week, as warnings from rating agencies raised concern of a deeper global recession. Towards the end of the week supply concern resurfaced and pushed yields higher. It was announced that a record US$94bil government bonds will be auctioned next week. As at Thursday’s close, 2-year UST rose 2 bps from last Friday to 0.99%, 5-year closed unchanged at 1.87%, 10-year fell 4 bps to 2.86% and 30-year fell 1 bp to 3.67%.

Foreign Exchange Market

The US dollar remains firm against major currencies as the top safe haven leader. As investors’ confidence is still low despite on-going efforts by major nations to shore up their respective economies and financial markets, the US dollar is expected to be well supported on safe haven demand.

Continuous stream of negative news coming out of the Eurozone and Britain made the EUR and GBP downtrend seem more entrenched. Expect EUR/USD and GBP/USD resistance at 1.30 and 1.50 to cap for fresh downside in the weeks to come.

The Yen could be losing its safe haven status judging by its fall against major currencies this week. The prospect of many countries inching towards implementing zero interest rate policy means the JPY is fast losing its attractiveness as a funding currency and this could lead to more Yen weakness against the USD.

USD/MYR hit as high of 3.6670 this week in tandem with the higher USD/regional currencies. Continued USD strength against major currencies and domestic economic concerns could see USD/MYR supported above 3.63 for a test towards 3.68.

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