Downgrades stay prominent in July led by Indian FI downgrades. Average upgrade/downgrade ratio improved marginally to 0.47x from June’s 0.30x; YTD average at 0.56x. Indian bank’s rating were lowered to reflect a lower level of support from the Indian government to some State-owned Indian banks, support which was weaker than previously presumed by Moody’s following the Indian government’s stance not to i

2 August 2017

Credit Market Monthly Review

July 2017

Tepid Trades and Issuance in MYR bonds; Indian FI’s Downgraded   

Market Review

¨   MYR Credit Market: MYR rallies while MGS weakens. The Malaysian bond market rallied in July with the TR BPAM All Bond Idx returning 0.25% (vs KLCI Total Return: -0.19%), despite the rise in govt yields. Government bonds outperformed over the month +0.24%, even as the government yield curve bear steepened. The 10y MGS started moving up towards 3.99% (+7bps MoM) while 3y MGS rallied to 3.32% (-3bps MoM).

Corporate spreads continued to compress as govvies fell. Trading for the month of July was tepid as corporate bond trading fell to just below MYR7.0bn. Trading in government bonds saw MYR41.8bn change hands, the lowest volume seen in 2017. The quasi-government segment outperformed over the month, returning 0.30% MoM compared to 0.22% for all corporate bonds and 0.21% for AAA-rated bonds, outperforming the government bond index. Credit spreads performed well across, as a lack of trading and issuances continued to support prices despite the rise in the MGS yield curves; foreign ownership in MYR bonds fell MYR330m in June.

¨   APAC USD Credit Market: Treasuries were well in demand in July as markets turned to safe havens amid the concerns over the US political situation and the spree of weak US economic prints. The latest AHCA failure further casted doubts over President Trump’s ability to deliver on his fiscal policy pledges. US economic prints during the month under review were particularly soft – dampening expectations for the December hike. The US Fed left interest rates unchanged at its July meeting, without providing much clues over its balance sheet reduction plans, though recognising that US inflation has been stubbornly below the Fed’s expected 2% target. The 2y UST narrowed -3.3bps MoM to 1.35%, while the 10y declined -1bp to 2.29%; Downgrades stay prominent in July led by Indian FI downgrades.

Rating Trends

¨   Downgrades stay prominent in July led by Indian FI downgrades. Average upgrade/downgrade ratio improved marginally to 0.47x from June’s 0.30x; YTD average at 0.56x. Indian bank’s rating were lowered to reflect a lower level of support from the Indian government to some State-owned Indian banks, support which was weaker than previously presumed by Moody’s following the Indian government’s stance not to increase its planned capital injections, to promote capital with better cost control, asset sales and improved management. This was further evident with the introduction of the financial resolution and deposit insurance bill which highlights the government’s preference for market discipline and limit the use of public funds to bail out distressed entities. Elsewhere, the rampant downgrades of Chinese corporates i.e. Hengdeli Holdings, CAR Inc and Sunac China Holdings on the back of weaker credit profiles and related party transactions whereas China Hongqiao was downgraded due to lack of corporate governance given its delays in filling its financial accounts. Over to positive rating actions, there were 8 upgrades in the month under review. Samsung Electronics and EnergyAustralia were rewarded for their stable operations in the respective business segments, whereas perceived stronger probability of government support drove Shanghai Pudong Development Bank’s rating a notch higher at BBB with Fitch. In the property space, Moody’s upgraded Pakuwon Jati due to its solid investment portfolio, which generate stable and recurring income, mitigating risk from its property development business. S&P, meanwhile, upgraded China Aoyuan Property premised on improved property sales performance and a disciplined acquisition profile.

Outlook

¨   The shift in the ECB’s policy communication to the hawkish side has caused some volatility in global yields, as the minutes continue to strike positive messages on growth, expecting it to raise wage and prices, chiming in to similar messages by the US Fed’s attitude that seems unwavering towards reducing reinvestment of its balance sheets despite the lack of inflationary pressures. The recent rise in consternation among international investors on the US administration with a growing investigations into its members and unfolding leadership issues distracting from tax, legislative and fiscal reforms expected of it since the beginning of the year, has had its effect on the USD and UST yields. This has led to a divergence in DM currency performances and a fall in the USD. On a credit point of view, we would remain cautious of the slowing of an export-driven growth in Asia, the divergent paths the central banks in EM Asia and the DM; and the effect of increasing cost of credit in light of a strong expansion seen in the corporate bond market in 2017, limiting further strong performance of the HY space in Asia. We expect a tapering down of issuance in Asia Pacific, especially after the strong 1H issuances, though we do continue to expect a healthy pipeline in Malaysia over the coming month in light of funding requirements. The level of reserves, the flows of funds into financial assets and the yield differentials will be ongoing concerns for the credits in EM Asia for the rest of the year.

Table 1: Index Movements

Indices	31-Jul	Changes (bps)
		1M	3M	YTD
iTraxx AxJ 5y IG	82.0	-4	-12	-34
AxJ IG Spread (bps)	169.2	-3	-3	-12
AxJ HY (%)	6.68	2	23	-18
UST 2y	1.35	-3	9	16
UST 5y	1.84	-5	2	-9
UST 10y	2.29	-1	1	-15
SOR 2y (%)	1.26	-1	-18	-50
SOR 5y (%)	1.73	-4	-17	-67
SOR 10y (%)	2.21	-4	-17	-68
MGS 3y (%)	3.32	-3	8	-17
MGS 5y (%)	3.69	7	0	4
MGS 7y (%)	3.91	1	0	-16
MGS 10y (%)	3.99	7	-5	-20
AAA 5y Spread* (bps)	61	-7	-1	-15
AAA 10y Spread* (bps)	67	-7	3	15
AA 5y Spread* (bps)	96	-6	-1	-17
AA 10y Spread* (bps)	103	-7	9	7

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

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