The main geopolitical concerns we expressed the month before have abated, the relationship of the US and China seem to have stabilised, the concerns on the Semi-annual Report on International Economics and Exchange Rate Policies did not result in the labelling of a currency manipulator, and the results of the first round French elections have comforted geo-political concerns. This has led to a rally in regional a

11 May 2017

Credit Market Monthly Review

April 2017

Bonds Rally in April; Falling Yields Encouraged Primary Market Activity   

Market Review

¨      MYR Credit Market: Local bonds rallied but weaker than the equity market. The Malaysian bond market rallied in April with the TR BPAM All Bond Idx rallying 0.64% (vs KLCI Total Return: +1.66%), mainly due to the better performance from the govvies. Government bonds rallied 0.75% during the month as the MGS curve bull steepened unwinding most of the losses seen in the previous month with the 3y MGS rallying -32bps MoM to 3.21%, while the 10y MGS saw yields fall -8bps to 4.05%.

Corporate bond spreads fell amid strong govvie rally. Trading fell to a mere MYR6bn after 3 months of strong performance. The quasi-government segment underperformed the better performing corporate sector which saw 0.51% return for the month. AAA bonds saw spreads widen 14bps and 9bps for the 5y and 10y segments, as the same segments in the MGS fell -16bps and -8bps respectively. The AA segment also saw spreads for the 5y widen a similar -16bps. Elsewhere, issuance remained robust in April, while BNM clarified on its hedging measures.

¨   APAC USD Credit Market: Treasuries rallied in April; 10y slipping 11bps MoM to 2.28%, while the 2y rose 1bp to 1.26% as geopolitical concerns take center stage, compounded by concerns of President Trump’s ambitious policies. Asian IG credits spreads widened. Slew of supply in April which represents a 53% YoY rise to USD30.5bn. Average upgrade/downgrade ratio of 1.06x faring slightly better than March’s 1.0x.

Rating Trends

¨   Average upgrade/downgrade ratio of 1.06x faring slightly better than March’s 1.0x. Among the 17 upgrades during the month were mostly Chinese credits with upgrades or affirmation of mostly high grade rated players i.e. Tencent Holdings, Sinopec Group, China Metallurgical Group benefitted from strong cash flows, leverage profile and business position. Furthermore, rated Chinese property companies Yanlord Land and Powerlong Real Estate received upgrades from Moody’s on their improved liquidity position. Moreover, Moody’s opines that the Chinese property credits to remain stable in 2017 mostly underpinned by improving leverage, disciplined financial management and a slowdown in debt funded acquisitions despite slowing sales growth and against the backdrop of tighter government controls. On the flipside, liquidity/refinancing risks has led to cuts in ratings to Lippo Karawaci, Gajah Tunggal and MIE Holdings. China Hongqiao ratings were downgraded further into junk territory on material weakness in credit controls as the company delays the publishing of its 2016 annual report.

Outlook

¨   The main geopolitical concerns we expressed the month before have abated, the relationship of the US and China seem to have stabilised, the concerns on the Semi-annual Report on International Economics and Exchange Rate Policies did not result in the labelling of a currency manipulator, and the results of the first round French elections have comforted geo-political concerns. This has led to a rally in regional assets, as all markets in EM Asia saw a boost especially for Malaysia. Though we believe the recent rally to be a fundamentally driven shift, we believe there is reason to be cautious especially in light of (i) geopolitical risks still remaining unresolved, (ii) seasonalities which could hamper some of the recent rallies, and the (iii) continued pricing in on future moves of the FOMC.

Table 1: Index Movements

Indices	28-Apr	Changes (bps)
		1M	3M	YTD
iTraxx AxJ 5y IG	93.7	-1	-2	-22
AxJ IG Spread (bps)	175.5	5	2	-11
AxJ HY (%)	6.43	-2	0	-31
UST 2y	1.26	1	0	7
UST 5y	1.81	-11	-12	-11
UST 10y	2.28	-11	-11	-16
SOR 2y (%)	1.44	-11	-14	-32
SOR 5y (%)	1.94	-13	-2	-46
SOR 10y (%)	2.38	-13	-18	-52
MGS 3y (%)	3.21	-32	-9	-35
MGS 5y (%)	3.72	-16	2	-1
MGS 7y (%)	3.91	-12	-3	-22
MGS 10y (%)	4.05	-8	1	-17
AAA 5y Spread* (bps)	59	14	-2	-9
AAA 10y Spread* (bps)	63	9	2	13
AA 5y Spread* (bps)	95	14	-3	-11
AA 10y Spread* (bps)	93	1	-8	0

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

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