Business

Saturday August 8, 2009

Treasure pulse


Malaysian Bond Market

THE MGS market started the week strongly, carrying the momentum from last week. Ringgit play – foreign inflow into the MGS market mainly to ride on ringgit strength – was seen to drive the strong run in MGS, similar to what happened in early 2008.

However, the positive June export figure for Malaysia (which improved 5.1% m/m) swiftly took the steam out of MGS. Selling pressures were seen across the MGS curve, bringing yields especially at the front end of the curve to marginally above last week’s closing levels. The long-end of the MGS curve, however, remained resilient, supported by yield-seeking investors. This led to a bearish flattening (i.e. short-term yields go up more than long-term yields) trend of the yield curve.

Our main investment strategy of shifting portfolio weight from MGS (which is mainly driven by interest rates), to seek high running yields via private debt securities or PDS (which is mainly driven by credit strength) remains unchanged since April 2009. The core rationale of our strategy lies in our view of gradual economic recovery in the medium term.

In our view, interest-rate cycle has hit a trough, which means limited interest-rate driven upside for an investment portfolio. Against this backdrop, gradual economic recovery can only lead to rising interest rates pressure, which is negative for interest-rate driven instruments such as MGS.

On the other hand, economic recovery is positive for corporate fundamentals. In addition, with the much-improved sentiment in the capital markets, corporate credit strength is poised to strengthen going forward. Coupled with the still-high prevailing yields available in the PDS market – which has not caught on to the massive rallies in the global credit markets – we think local PDS is poised to make a good run.

We have seen strong signs of rising appetite in the PDS market, as evidenced from the consistently rising volume in the whole PDS market since 1Q2009, especially in the double-A segment.

Another sign of strong investor appetite was the play on the prospect of Maxis’ re-listing via the bond market. Binariang’s (the 100% shareholder of Maxis) bonds were aggressively bought up by investors as an M&A play on Maxis’ re-listing, as the terms of the bonds stipulated that half of the IPO proceeds shall be used to redeem Binariang’s debt.

In our view, Maxis’ re-listing is positive for both the equity and the bond market. Should the Maxis re-listing lead to partial buyback of Binariang bonds, the supply of high-yielding PDS will be further reduced. This will boost the scarcity value of good high-yielding PDS, which are getting harder to come by.

In addition, the potential capital gain by Binariang’s bondholders may even lead to stronger appetite in the PDS market. This could be George Soros’ “Theory of Reflexibility” at play.

Up to Thursday, RM10.7bil trades were recorded in the MGS/GII market, or RM2.67bil per day on average. This is markedly higher than the average of RM1.4bil in the previous week. The 3-year benchmark MGS’8/12 closed 3 bps up from the previous Friday at 2.91%, and the 5-year benchmark MGS’4/14 rose 2 bps to 3.70%. At the longer end, the 10-year benchmark MGS’11/19 fell 4 bps to 4.22% and the 20-year benchmark MGS’9/28 closed 20 bps down at 4.65%.

RM1.56bil trades were recorded in the PDS market up to Thursday, or daily average of RM389mil. About 55% of the trades were contributed by the AA segment, and 35% by the GG and AAA segment.

The bulk of the trades were contributed by Binariang bonds, with RM388mil done on 2013-2022 tranches and closed at 5.00%-6.45%. MISC ‘7/12 closed at 3.57% with RM186mil changing hands.

MYR Interest Rate Swap (IRS)

MYR IRS rates were traded substantially higher during the week after stock markets extended the rallies and incoming data showed that the economic situation was not as dire as previously expected. Substantial volumes were also recorded during the week in contrast to the previous two weeks. Overall, the yield curve ended the week by10-15 bps higher.

US Treasury (UST)

UST yields closed sharply higher as strong economic data and the stock market rally reduced safe-haven demand for treasuries. Supply concern re-emerged ahead of the US$75bil government debt auction next week.

The UST yield curve steepened during the week. As at market close on Thursday, the 2-year UST closed 9 bps up from the previous Friday at 1.20%, 5-year yield rose 19 bps to 2.71%, 10-year yield rose 27 bps to 3.75% and 30-year yield rose 24 bps to 4.53%.

Foreign Exchange Market

Improving risk sentiment continues to weigh on the USD against most major currencies. Although the market is still looking for more concrete signs of US economic recovery, the USD downtrend remains intact as recent economic data supported the notion that the worst of the global recession is likely to be passing slowly.

The strong link among EUR , GBP and risk trends was the reason behind their surge vs the USD in spite of weak underlying growth in the Eurozone and UK. With the current broad risk rally showing no sign of abating, expectation is for the EUR and GBP to attain a new 2009 high in the weeks ahead.

The USD/MYR traded to a low of 3.4840 this week on brighter global economic recovery outlook. Bias remains to the downside for the pair given the prevailing general USD weakness and any rebound is seen limited to 3.52 with 3.47 as downside targets to be tested early next week.

l For enquiries, please contact:


fu-yew-sun@ambg.com.my


karen-wan@ambg.com.my


ng-juan-hui@ambg.com.my

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