Fed Acknowledgment Leads to UST Rally, USD Falls

27 July 2017

Credit Markets Update

                                               

Fed Acknowledgment Leads to UST Rally, USD Falls

MYR Credit Market:

¨         Weak trading continues to drag MYR and MGS. EM Asia markets extended their weakness as investors remained on the sidelines prior to the Fed FOMC meeting. The MYR too continued to fall to 4.2847/USD (-0.08%). The MGS yield curve further flattened as the long end of the curve continued to weaken. The 3y MGS rallied to 3.31% (-3.2bps) while the 10y MGS fell to 3.99% (+1.8bps). The recent start of the FOMC meeting and statement, which resulted in the rally in USTs and the fall in the USD is expected to lead to a rally in EM Asia currencies and the local bond yields in EM Asia.

¨         Weak trading before the FOMC. Trading in govvies remained subdued as just over MYR1.9bn govvies changed hands, concentrated as usual from the belly to the front end of the curve. The benchmark 5y, 7y and 10y MGS saw strong trading as MGS 03/22, MGS 09/24 and MGS 11/27 as MYR180m, MYR160m and MYR101m trades were done respectively at +0.2bps to +2bps higher. Trading in corporates were just as weak with only MYR212m recorded. The RANTAU 12/20 accounted for MYR75m of the traded falling +3.8bps to 4.12%.

¨         Over in the primaries, Tadau Energy Sdn Bhd issued MYR250m of its AA3-rated sukuk program. The issuance was distributed across 15 tranches of maturities between 2y-16y with yields ranging between 4.80% and 6.20%. The issuances were close to 130-150bps against benchmark GII closing yields. The reopening of the 10y MGS 11/27 will be auctioned today. The rally in global yields it is expected to weaken yields from the WI of the previous day.

APAC USD Credit Market:

¨         Treasuries rallied overnight as expected the US Fed’s left interest rates unchanged at the July FOMC meeting and in its post meeting statement highlighting the Fed’s balance sheet reduction plans will start ‘relatively soon’ while recognising that inflation may be below the Fed’s expected 2% target. UST 2y and 10y yields declined -3.5bps to -4.8 bps to 1.36% and 2.29% respectively, whereas the DXY weakened -0.41% to 93.67 given the slightly dovish tone.

¨         IG bonds spreads tightened approximately 2bps to 169.5bp whereas HY bond yields rose 2bps to 6.68%. In the CDS space, the iTraxx AxJ IG was 1bp lower, quoted at 83.3bp with CDS spreads declining across the board except for Kookmin Bank which edged 3bps wider. Elsewhere, Noble Group 20’ bonds yields jumped 9 percentage points after the company issued a 2Q profit warning that it will post a USD1.7-1.8bn quarterly loss.

¨         Turning to ratings, Fitch revised Oceanwide Holdings’ outlook to neg; affirmed at B. Premised on slower sales than Fitch forecasted, which will push its net debt higher. Oceanwide’s rating has been constrained by its high leverage which will continue to increase over the next 18-24 months as the company ramps up its capex plans in efforts to support its property sales growth and its finance business. Fitch also downgraded Hengdeli Holdings Limited to B-/Sta from B+ to reflect its weaker market share in the retailing of Swiss watches in China and a smaller operating scale after disposing of key assets. Fitch estimates that following the asset disposal, Hengdeli’s remaining businesses will only account for 20% of sales by the pre-disposal group in 2016, which will generate lower profitability. On more positive news, Moody’s places China Travel Service’s (CTS) Baa3 rating on review for upgrade driven by its improved financial leverage, backed by robust earnings growth from its real estate development business, despite increases in debt to support its expanded operations. CTS has four main businesses namely travel services, real estate development, finance and logistics. Furthermore, it is wholly-owned by China National Travel Service Corporation which in-turn is wholly owned by China’s State-Owned Assets Supervision and Administrative Commission (SASAC). Moody’s forecasts that the company’s debt/EBITDA and FFO/debt is to improve 4.7x and 0.16x respectively from 6.9x and 0.11x in 2016.

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