Ø MGS market remained well bid with the 10y MGS yield down by 2bps WoW. Some

Dear all,

Credit Market Watch: Summary for week ending 17-Feb

·         MYR Credit:

Ø  MGS market remained well bid with the 10y MGS yield down by 2bps WoW. Some foreign buying was seen at the new 10y GII benchmark. Activity also picked up in the corporate bond space with increased interest in 5-10y tenor bonds and last week’s traded volume of MYR3.5b is the highest weekly amount since 28th October 2016. Overall, better buying was seen across the board and credit spreads tightened 1-7bps WoW.

Ø  Econs: 4Q16 GDP growth printed at 4.5%, in line with our economic research expecting a pick-up in the final quarter albeit at a slower pace (consensus: 4.4%, Maybank-IB: 4.7%), The growth came on the back of a rebound in exports/imports and resilient domestic demand, albeit having moderated. Our house maintains its GDP growth forecast of 4.4% for 2017 (2016: 4.2%). 2016 budget deficit met the 3.1% of GDP target allaying concerns on the sovereign’s ratings.

Ø  YTL Power: RAM assigned and affirmed AA1/stable to YTLP’s new proposed MYR2.5b Sukuk Murabahah and existing MYR5b MTN programme. The new sukuk is financing a 1,320MW coal power plant in Indonesia and a 470MW oil-shale power plant in Jordan. Despite YTLP’s rising debt, the rating agency remains comforted by the group’s huge cash pile which stood at MYR9.8b at end-Jun 2016, of which MYR8.7b are unencumbered. The agency also expects the performance of the UK water business and other power assets to remain robust, offsetting the weak PowerSeraya.

Ø  Relative value: Bumitama’19 appear to offer value as it last traded at 4.70% which is 17bps above our fitted line. Bumitama’s crop production recovery appears to be underway as yield rebounded strongly in 4Q16 up 3.9% YoY to 5.3t/ha, bringing 2016 full-year output to 1,513k MT or -4.1% YoY (vs the company’s -5% guidance).

·         Asian Credit:

Ø  UST curve was little changed along the 2y10y WoW as bonds rallied late last week erasing earlier losses. With much optimism on the economy been priced in, the onus is on Trump administration to deliver. As we move closer to the French presidential election with the first round scheduled on 23 April, the EU political tone may turn even more cautious due to the rising popularity of Marine Le Pen, a far-right candidate who could significantly increase the EU breakup risk. The 10y UK Gilt yield reached 1.21% last week, the lowest level since 7th November thus fully reversed the selloff trigged by “Trump Tantrum”.

Ø  Asian USD credit continued to show a tightening bias, with spreads on JACI composite -4bps, JACI IG -3bps and JACI HY -6bps WoW. In sovereign space, the MALAYS curve outperformed lowering by 4-8bps WoW, while INDON and PHILIP were around flat to marginally higher in yield for the week.

·         CDS: EM Asia 5y CDS spreads extended the tightening trend, led by China -4bps, followed by Malaysia, Philippines and Thailand each -3bps WoW while Indonesia inched 1bp lower.