Business

Saturday August 8, 2009

Bond market improves on better sentiment

BY YAP LENG KUEN


KUALA LUMPUR: The bond market, which includes all long and short-term papers, has seen an 8% growth over the last seven months, according to Bond Pricing Agency (BPA).

Based on the net change in amount of bonds outstanding, this almost doubled the 4.61% recorded last year, BPA chief executive officer Meor Amri Meor Ayob told StarBizWeek.

“Sentiment has improved over the last two to three months,’’ he said, adding that strong names attracted over-subscription.

Government bonds were the star with a net change of RM32.3bil in the first seven months compared with RM34.2bil for the whole of last year.

However, the corporate bond market is showing signs of improvement. “Confidence in the corporate bond market started to regain momentum in the earlier part of the second quarter,’’ Wan Murezani Mohamad, head of fixed income research, Malaysian Rating Corp Bhd, told StarBizWeek.

“This could have been due to less dovishness in the central bank’s rhetoric, front-loaded monetary easing and fiscal stimulus packages gaining traction.’’

In the primary market, new corporate bond issuance rose by 99% to RM19.3bil for the second quarter compared with the average in the previous three quarters.

In the secondary market, a daily average volume of RM195mil crossed hands in the second quarter, a 50% jump from that recorded in the previous quarter.

New corporate bond issuance rated by RAM Rating Services Bhd stood at RM6.8bil as at end-July, of which RM5.5bil, or 81%, was raised in the second quarter.

“Our second-quarter issuance was 4.3 times larger compared with issuance in the first quarter,’’ said Liza Mohd Noor, CEO of RAM Ratings.

RAM Ratings had received a higher number of rating requests and registered a higher pick-up in mandates for new ratings as early as April and the momentum has accelerated in the past two months.

Given the sizeable rating mandates in its pipeline, RAM Ratings has revised its 2009 forecast on gross corporate debt issuance to between RM30bil and RM35bil from RM25bil.

With government bond yields coming under pressure of high supply, yields for conventional and Islamic corporate bonds had been increasing over the same period, said Meor.

“There is less flight to quality in tandem with the return of investors’ confidence,’’ Liza said, adding that the switch to higher-yielding corporate bonds on a selective basis was also exerting pressure on government bond yields.

Wan Murezani said in view of the widening budget deficit, concerns over supply of government bonds had partly prompted the switch to corporate bonds for which demand would still be centred on the higher grades.

Against the brighter outlook on corporate bonds, the rally in the equities market has yielded a 26% gain compared with 3.5% in the bond market since beginning of this year. “Global and regional equities have rallied significantly since the beginning of the second quarter,’’ said Wan Murezani.

“We think this rally is quite fast, considering the fact that global economies are still in a recessionary mode and the source of the financial malaise, the US housing market, has not really shown a clear sign of sustainable recovery.

“Judging from the market movement, it looks like a meaningful recovery by the second half has been almost fully priced in. The risk that is still significant, at this juncture, is that of an economic relapse and slower-than-anticipated recovery.’’

Liza advised companies to consider an optimal capital structure with a “mixed bag of equity and debt.’’ No doubt the recovery of the equities market has brought back an important avenue for fund raising, but the alternatives offered by the fixed-income market has higher propensity for capital preservation.

The long-term outlook for the Malaysian bond market is bright, according to Liza.

“Despite the impressive economic achievements thus far, Malaysia as in the case of other fast-growing Asian countries, still requires ‘old economy’ type of infrastructure investments such as ports, roads, rail, electricity and water assets. It also requires the ‘new economy’ type of broadband and telephony infrastructure,” she said.

“We also deem the current penchant for bank loans to be a temporary occurrence,’’ she added. “With interest rates at historical lows and base lending rates possibly bottoming out, we anticipate the corporates to return to the bond market.’’

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