¨ MYR Credit Market: Local bonds underperformed the equity market. The Malaysian

5 April 2017

Credit Market Monthly Review

March 2017

Busy Month for Primary Issuance   

Market Review

¨      MYR Credit Market: Local bonds underperformed the equity market. The Malaysian bond market suffered minor losses in March with the TR BPAM All Bond Idx falling 0.05% (vs KLCI Total Return: +3.15%), mainly due to the weaker performance from the govvies and quasi-government bonds. Government bonds dropped 0.07% during the month as MGS curve bear flattened with the 3y rising 24bps MoM to 3.53%, while 10y rose 10bps to 4.13% following the global risk-off sentiment after activation of Article 50 and  policy uncertainties in the US.

Quasi-government bonds plummeted, AAA bonds ended flattish in Mar amid heavy primary market. Trading volume was maintained around the MYR11bn region for the third consecutive months. Long-dated bonds dragged the performance for the quasi-government and AAA bonds amid the heavy bond issuances of MYR20bn this month. Return remained good for bonds in the <3y bracket. The shorter tenure bonds were still the top traded during the month (46% of total trading volume) where we continue to note interest in financial bonds.

¨   APAC USD Credit Market: UST remained largely unchanged MoM, with 2y and 10y notes trickled down by less than 1bp to 1.25% and 2.39% respectively at end-March as investors had already priced in the March FOMC rate hike. Busy month for APAC primaries. Strong supply of new credits remain with a total of USD38.7bn issued during the month; growing 73% MoM.

Rating Trends

¨   Average upgrade/downgrade ratio of 1.0x against February’s 0.67x. Among the 15 upgrades were mostly Chinese credits such as Fufeng group, China Aoyuan Property, Longfor Properties and West China benefitting from improved profitability, and cash flows and as a result improved credit metrics and leverage profile, while, rating of Indonesia’s second largest telco operator in PT Indosat Tbk was lifted to BBB/sta on parental support. Elsewhere, notable downgrades was Parkson Retail and China Hongqiao. The former’s woes continued as S&P slashed its rating lower to B/Neg on weaker profitability and lower leverage, whereas the latter was downgraded to B+ and placed on a credit watch as corporate governance issues surfaced.

Outlook

¨   The Fed raised the policy rates by 25bps in the March FOMC meeting, however Investors will now turn attention to the FOMC Minutes on the 6-April, as well as various US economic data and Fedspeaks to gauge US’ future interest rate trajectory. More policy risks expected from the US front after Trump cancelled his healthcare bill, raising the question on the newly inaugurated president’s ability to deliver his numerous fiscal promises. Other area of concern is the meeting between Trump and Chinese President on the 6-7 April, which could set the tone on issues such as global trade and North Korea. Uncertainties surrounding Brexit continued to resurface after UK officially triggered the Article 50, while French election on the 23-April will also be monitored after the result of the Dutch presidential election came as a relief as the far-right party did not manage to win significantly despite leading in the polls for over a year.

Table 1: Index Movements

Indices	31-Mar	Changes (bps)
		1M	3M	YTD
iTraxx AxJ 5y IG	94.7	-1	-21	-21
AxJ IG Spread (bps)	170.8	-3	-15	-15
AxJ HY (%)	6.45	2	-29	-29
UST 2y	1.25	-1	7	7
UST 5y	1.92	-1	-1	-1
UST 10y	2.39	0	-6	-6
SOR 2y (%)	1.54	-3	-22	-22
SOR 5y (%)	2.07	-2	-31	-33
SOR 10y (%)	2.51	-5	-39	-39
MGS 3y (%)	3.53	24	-3	-3
MGS 5y (%)	3.87	18	15	15
MGS 7y (%)	4.02	8	-11	-11
MGS 10y (%)	4.13	10	-8	-8
AAA 5y Spread* (bps)	46	-15	-23	-23
AAA 10y Spread* (bps)	54	-7	5	5
AA 5y Spread* (bps)	81	-17	-25	-25
AA 10y Spread* (bps)	92	-9	-1	-1

Source: Bloomberg, BNM, RHBFIC        *MYR-denominated bonds

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