MGS yields softened WoW in a lacklustre trading week with the 10y MGS yield up by 7bps to 4.15%. Corporate bond secondary market was muted with MYR2.3b traded volume. Of note, Danga 2026 widened a few bps as spreads gradually ad

Credit Market Watch: Summary for week ending 31-Mar

·         MYR Credit:

Ø  MGS yields softened WoW in a lacklustre trading week with the 10y MGS yield up by 7bps to 4.15%. Corporate bond secondary market was muted with MYR2.3b traded volume. Of note, Danga 2026 widened a few bps as spreads gradually adjust to higher govvy yields.

Ø  Econs: M3 growth slowed to 3.6% YoY in Feb from 4.4% in Jan, but the 2-month average of 4.0% in Jan-Feb 2017 is higher than 2.5% in Jan-Feb 2016, which our economic research reckons as sign of improve liquidity condition on the back of repatriation of export earnings and foreign net buy in equities overall offset outflows from bonds.

Ø  Banking: In Feb 2017, loan growth slipped to 5.3% YoY (Jan: 5.6%) but the uptick in loan applications and approvals rose 21% and 17% YoY respectively and if the momentum sustains, our banking analyst reckons that loan growth could pick up in 2H17. Interest spreads improved from 1.49% in Oct 2016 to 1.63% in Feb 2017 which could lead to better bank margins. Deposits grew by 2.5% YoY (January: 3.1%), loan/deposit ratio dipped to 88.7% (January: 89.4%), while GIL ratio remained stable at 1.63% (January: 1.61%).

Ø  Relative value: The recently issued Quill Retail Mall bonds totalling MYR350m were to refinance the outstanding MYR420m MTN. The new bonds were issued at yields much wider than the underlying rating, a reflection of its weak credit and concerns on Quill City Mall’s occupancy sustainability, albeit having reached 80% in 2016, amid the cautious consumer sentiment and incoming retail space supply and slow rental collection. To recap, EPF is in the midst of terminating its proposed acquisition of the mall after certain undisclosed pre-conditions were not met. Elsewhere, we see some value in FRL’s 2020 and 2021 bonds which were last dealt 8-14bps above the fitted AA2/AA line.

·         Asian Credit:

Ø  UST yields traded in range with the 10y yield down 2bps WoW. On US economic data, February’s PCE deflator YoY accelerated to 2.1% (Jan: 1.9%), the highest since Apr 2012 but PCE core YoY remained stable in the 1.75% area and consumer spending in February slowed to 0.1% MoM (Jan: 0.2% MoM).

Ø  Asian USD credit was overall stronger with narrower spreads: JACI composite -2bps, JACI IG -3bps and JACI HY -6bps WoW. Sovereign names showed a similar tone, with INDON, KOREA, MALAYS and PHILIP slightly stronger by about 1-5bps WoW.

Ø  China: PBOC raised SLF rates, generally seen as the upper bound of interest rate corridor, over the weekend. Overnight tenor +0.2% to 3.3%, 7D tenor +0.1% to 3.45% and 1M tenor +0.1% to 3.80%. This followed the reverse repo and MLF rates increase in mid-March after the US Fed hiked FFR by 25bps.

Ø  Rating changes: China Vanke’s outlook was revised back to Baa1/stable from negative by Moody’s after the resolution of corporate tussle between the senior management and some major shareholders last year. The agency expects the management, which prevailed in the tussle, to maintain business direction and financial policy, and comforted by operating results which saw contracted sales +39.5% YoY and revenues +24.2% YoY in 2016 despite the disputes. Also, credit metrics remained healthy with adjusted net debt/net capitalisation at 23.8% and EBIT/interest at 9x in 2016.

·         CDS: EM Asia 5y CDS spreads were marginally narrower with Thailand -3bps, China, Indonesia and Philippines -1bp while Malaysia flat WoW.