Credit Market Watch: Summary for week ending 2-Dec

Credit Market Watch: Summary for week ending 2-Dec

·         MYR Credit:

Ø  MGS yield curve bull-steepened with the 5y point down 17bps, 10y point down 4bps and 15y point down 2bps WoW. Benchmark government bonds turned firmer mid-week attributed to buying flows, while selling pressure continued on selected off-the-run bonds. Corporate bond yields were mixed with the short and long ends broadly tighter WoW, while the belly widened 1bp. Trading activity still muted, but with better volumes in 5y10y sector.

Ø  BNM FX Measures: BNM announced several measures aimed at enhancing liquidity in the onshore FX market, among which include streamlining rules for investment in foreign currency assets, flexibility to hedge USD and CNY exposures up to MYR6m per client per bank, fund managers can actively hedge up to 25% of invested assets and offshore non-resident FI may participate in the Appointed Overseas Office (AOO) framework which offers additional flexibilities on Ringgit transactions. Importantly, 75% of new export proceeds in foreign currency received from 5 Dec 2016 will need to be converted to Ringgit. This compares only 1% of net export proceeds (trade surplus) in 2011-2015 were repatriated and 28% in 2006-2010. Link to BNM statement.

Ø  Banking: Loan growth rose in Oct to 4.5% YoY attributed to the corporate loan segment as household loan expansion continued to slowdown. Deposits grew 2.6% YoY, and LDR remained steady at 88.7%. GIL ratio also held steady at 1.65%. While annualized loan growth comes up to just 4%, our equity analyst maintained the full-year growth estimate at 5.3% on expectations of a healthy corporate loan pipeline. 2017 forecast, however, is reduced to 4.7% from 5.3%.

Ø  Relative value: The dislocated credit spreads continued to normalise with corporate bonds generally underperforming the MGS.

·         Asian Credit:

Ø  US Treasury curve steepened WoW with the 10y yield 3bps higher at 2.38%. The US nonfarm payroll in November showed a gain of 178k, close to the consensus of 180k and higher than 161k in prior month. Unemployment rate shrank to 4.6% from 4.9% partly due to lower participation rate. Wage growth disappointed at 2.5% YoY (Oct: 2.8% YoY), but shouldn’t stop the Fed from raising interest rate next week.

Ø  Asian USD credit spreads were little changed, with spreads on JACI composite flat, JACI IG +1bps and JACI HY -3bps WoW. Sovereigns underperformed with INDON yields higher by about 15-20bps on new USD bond supply, while KOREA, MALAYS and PHILIP saw a milder 5-10bps increase in yields WoW.

Ø  Rating changes: 1) Reliance Communications was downgraded to B1 from Ba3 by Moody’s, citing continued contraction in profitability and the rise in leverage with adjusted debt/EBITDA exceeding 7.0x; risks of further downgrade remains as credit profile may be altered on structural reorganisation, i.e. demerger of its wireless business and sale of tower assets and related infrastructure. 2) CITIC Securities’ outlook was revised to stable from negative by S&P, citing improvement in risk governance help offset high industry risk over the next 12-24 months while maintaining healthy buffer over capital ratio threshold of 10%.

·         CDS: EM Asia 5y CDS spreads narrowed on receding USD strength, led by Malaysia -8bps, Philippines -3bps while China, Korea and Thailand -2bps each.