Business

Saturday July 18, 2009

Treasury Pulse


Malaysian Bond Market

IN a classic example of market ‘mood swing’, global financial markets swung back to positive tone following strong earnings reports by Goldman Sachs and JP Morgan, coupled with robust GDP announcement from China.

Adding to this optimism is the prognosis by economist Nouriel Roubini – dubbed Dr. Doom for correctly predicting the financial crisis – that the worst of the financial crisis is over, and that recession may end this year. This is a notable remark as Roubini has been one of the most bearish guys so far.

On the local front, manufacturing sales value fell for the seventh consecutive month in May 2009, by 25.9% y-o-y compared to a 26.3% decline in the previous month. However on a m-o-m basis sales value actually gained 2.2% in May, its third gain in the past four months.

This trend is consistent with global economic indicators, that on y-o-y basis they are still hovering at low levels partly due to high-base factor last year, but on a m-o-m basis they have been on a consistent uptrend since 1Q09.

In addition, while lagging indicators (e.g. GDP, exports, IPI, etc) are still showing economic weaknesses, notable leading indicators such as consumer sentiment and PMI indices are showing signs of recovery.

As shown in the fickle mindedness of the global financial markets, and the easy swing between pessimism and optimism, it is important for investors to have a firm view on economic and market outlooks to form a consistent portfolio strategy.

In this regard, we have not changed our strategy of shifting allocation from MGS to PDS to achieve a higher running yield, amid the extended low interest rate environment.

We advocated going down the credit curves in search of good yield buffer above MGS to mitigate the vulnerability of the yield curve, and to capitalise on improvement in credit outlook in the medium term.

Also, with issuance pipeline gyrating to the AAA and GG segments, we see improving scarcity value for lower-rated and higher-yielding PDS going forward.

In line with our prognosis, we have seen PDS trading volume slowly trending up from RM100mil-RM200mil per day in the beginning of the year to about RM300mil per day lately.

This is a positive development, as a buoyant PDS market is complementary to economic recovery, which in turn would improve credit outlook in a positive spiral.

Up to Thursday, RM5.6bil trades were recorded in the MGS/GII market, or RM1.39bil per day on average.

This is slightly higher than average of RM1.2bil in the previous week.

The 3-year benchmark MGS’8/12 closed 3 bps up from the previous Friday at 2.90%, the 5-year benchmark MGS’4/14 rose 7 bps to 3.73%, the 10-year benchmark MGS’11/19 rose 5 bps to 4.33% while the 20-year benchmark MGS’9/28 fell 5 bps to 4.80%.

During the week, the 10-year MGS re-opening tender attracted bid-to-cover of 1.67 times. Bidded yields stood within 4.269%-4.320% and averaged at 4.294%.

RM1.5bil trades were recorded in the PDS market up to Thursday, or daily average of RM386mil. 60% of the trades were contributed by the double-A segment, and 30% by the GG and AAA segment.

In the GG and AAA segment, trades were seen concentrated on near-sovereign bonds. RM155mil were done on Cagamas ‘2010-2016, RM90mil done on Cagamas MBS ‘2010-2012, and RM65mil done on Danga Capital ‘2014.

Among the double-A bonds, RM155mil trades in total were done on YTLPI ‘9/11 and ‘4/13, closing at 4.00% and 4.46%. RM50mil were done on YTLPG ‘1/11 and ‘7/12, and RM45mil on YTL Corp ‘6/14. OCBC Malaysia ‘4/19 closed unchanged from last at 6.75% with RM190mil trades done.

Meanwhile, RM115mil trades were done on Berjaya Land ‘8/11 (rated A flat), closing at 7.73%.

MYR Interest Rate Swap (IRS)

MYR Interest Rate Swap rebounded from the low at the back of higher world equity prices during the week.

The mood swung back to positive after US corporate posted encouraging results while Singapore and China GDP figures showed they are climbing out from the recession.

Overall, the curve ended the week by circa 2-10 bps higher.

US Treasury (UST)

UST yields increased during the week, driven by strong equity performances, higher than expected inflation data and as a record-high US budget deficit reignited supply concern.

As at market close on Thursday, the 2-year UST closed 8 bps up from the previous Friday at 0.98%. The yield curve steepened as the 5, 10 and 30-year yields rose 23-27 bps to close at 2.45%, 3.57% and 4.45% respectively.

Foreign Exchange Market

The US dollar fell against most major currencies on a revival of risk appetite this past week.

Good earnings reports from a host of US corporates rekindled global economic recovery hopes to tarnished US dollar’s safe haven appeal but its left to be seen if the positive sentiment can build on itself to keep the US dollar on a sustained downtrend.

Improving risk sentiment helped the EUR and GBP to regain traction against the USD. In spite of the current global optimism, we still need a clear break of the EUR/USD and GBP/USD resistance levels of 1.43 and 1.66 respectively to signal a new bullish trend.

USD/MYR traded within 3.5550 – 3.5990 this week with external drivers dictating moves. The still choppy US dollar sentiment suggests the USD/MYR will likely consolidate within a 3.55 – 3.60 range for now.

·For enquiries, please contact:
fu-yew-sun@ambg.com.my,
karen-wan@ambg.com.my or
ng-juan-hui@ambg.com.my

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