Trading weak as market pauses. Trading in of Malaysian govvies remained tepid although it did improve as we saw MYR2.3bn changing hands. Trading in the corporate space remained healthy as trades amounted MYR457m. Trading was largely concentrated in property issuers Aman (MYR50mn) and Putrajaya (MYR95m). AMAN 05/21 and 03/20 were traded 0bps to -1.9bps lower at 4.23% and 4.15% whereas the longer dated AMAN 07/27 was traded weaker at 4.61%(+30.9bps). PUTRAJAYA 05/20 and 12/21 were traded at 4.13% (-6bps) and 4.26% (+10.4bps) respectively.

15 June 2017

Credit Markets Update

                                               

Fed’s Second Rate Hike; Explains Balance Sheet Normalisation

MYR Credit Market:

¨      Markets held awaiting Fed’s rate hike. Markets again remained largely unchanged as market participants remained cautious ahead of the Fed FOMC which occurred at the end of the day. In light of the increased dislodge between market expectations and Fed’s forecasts, we continue to expect a rally in EM Asia assets especially in currency and long term bonds. The MYR closed slightly stronger at 4.258/USD gaining less than 0.1% underperforming some of its better performing neighbours in the EM Asia complex. The 3y MGS rallied -3.6bps to 3.26% as the 10y MGS remained largely unchanged at 3.86%.

¨      Trading weak as market pauses. Trading in of Malaysian govvies remained tepid although it did improve as we saw MYR2.3bn changing hands. Trading in the corporate space remained healthy as trades amounted MYR457m. Trading was largely concentrated in property issuers Aman (MYR50mn) and Putrajaya (MYR95m). AMAN 05/21 and 03/20 were traded 0bps to -1.9bps lower at 4.23% and 4.15% whereas the longer dated AMAN 07/27 was traded weaker at 4.61%(+30.9bps). PUTRAJAYA 05/20 and 12/21 were traded at 4.13% (-6bps) and 4.26% (+10.4bps) respectively. 

¨      GII 10y Reopening at 4.013%. The 10y GII 07/27 Reopening saw average yield at 4.013% and a BTC of 2.54x. The BTC was weaker than the 3.41x seen in the auction in January, though 24.5bps lower, due to the rally seen in the market since. MYR3bn was auctioned and an additional MYR1bn privately placed.

APAC USD Credit Market:

¨      US Treasury curve flattened. As expected, the US Fed announced the second rate hike of 2017 of 25bps, moving the fed fund rate between the 1.00%-1.25% target range, and further highlighting the intention to reduce its balance sheet this year. Although the Fed did not disclose the overall size of the reduction and the timing, the plan will be to halt the reinvestments of large amounts of maturating securities. The tapering of its reinvestments in Treasuries and MBS could initially begin at USD10bn per month initially before raising to USD50bn per month in a year. On economic prints, US May core CPI slowed to 1.7% against consensus of 1.9% (prior: 1.9%) whereas retail sales fell -0.3% (prior: 0.4%). UST2y shed 3.2bps to 1.33%, while the 10y tumbled 8.5bps to 2.13%. The DXY index slipped 0.04% overnight to 96.94 (-0.36). Brent prices, meanwhile, plunged another 3.5% to USD47/bbl remaining under pressure from rising production, inventory and scepticism of OPEC ability to implement production cuts.

¨      Asian credit markets stay firm. The iTraxx AxJ IG tightened 2.6bps to 82.9bp support by the rally in most constituent names, especially across Chinese FIs after China’s Ministry of Finance announced plans to raise USD sovereign bonds equivalent of RMB2bn in the offshore markets in the second half of this year. Elsewise, IG credit spreads were stable at 175.3bp, while average speculative bond yields declined 1bp to 6.54%.

¨      Turning to ratings, Wanhua Chemical was upgraded by Fitch to BBB/Sta from BBB- premised on the improvement of China-based chemicals manufacturer’s financial profile and business diversification due to improvements its petrochemicals business, generating positive free cash flow. The group’s FFO-adjusted net leveraged decreased sharply to 2.9x in FY16 from 5.4x in FY15. Fitch slashes Greenland Holdings Group to BB/Neg from BB+ on the back of persistently high leverage (net-debt-to-adjusted inventory) above 60% as of the property player’s remained aggressive in landbank acquisition, further compounded by large construction expenditure which will further pressure leverage and the expectation of slower contracted sales growth.

¨      In the pipeline, Hilong Holding (B1/NR/BB-) plans sale of USD benchmark 3y bonds later today with initial price guidance at 7.75% area while Hainan Airlines (NR) will also tapped the markets for USD RegS June-18 bonds with IPT set at 5.75% area.

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