FW: RHB FIC Credit Markets Monthly Review - 8/9/17

 

 

8 September 2017

 

 

Credit Market Monthly Review

August 2017

 

Supply Return to MYR Bonds; Asian IG CDS Spreads See New Lows   

 

Market Review

¨   MYR Credit Market: Rally in MGS and MYR despite risk rout at the end of the month. The Malaysian bond market rallied in August with the TR BPAM All Bond Idx returning 0.70% (vs KLCI Total Return: +1.67%), as the MGS yields saw a strong rally especially in the long end. Government bonds outperformed over the month +0.72%, leading the rally of the other segments in the market. The 10y MGS rallied to 3.89% (-10bps MoM) while the 3y MGS weakened to 3.36% (+4bps MoM).

Trading saw a resurgence as credit spread widened on new issuances and MGS rally. Trading for the month of August saw a resurgence as corporate bond trading rose to just below MYR13.3bn; August at last saw the return of pent up issuances following multiple months of weak primaries; 2Q GDP stronger at 5.8% YoY; selldown in bond foreign ownership continues.

¨   APAC USD Credit Market: Treasuries rallied strongly in August; safe havens in play. The supposed quiet summer was rocked by the US-North Korea geopolitical tensions, terror attacks in Barcelona, further compounded by devastation of Hurricane Harvey (as well as Hurricane Irma). President Trump's aggressive statement "they will be met with fire and fury, the likes of which the world has never seen" following North Korea's constant missile provocation and threats to attack the US territory of Guam, and its latest hydrogen bomb test left investors scrambling to safe haven assets. Apart from the geopolitical tensions, UST yields saw further support as the highly anticipated Jackson Hole Symposium failed to inspire global investors while the US debt ceiling concerns loomed with Fitch warning that debt ceiling brinkmanship may threaten US credit rating should they fail to raise the debt ceiling in a timely manner; Primaries slowed to USD16.5bn; Upgrades returned led by HY credits.

 

Rating Trends

¨   Upgrades returned led by HY credits. Average upgrade/downgrade ratio improved to 1.1x from 0.47x in July, whereby there were 10 upgrades compared to 9 downgrades. Most upgrades were driven by HY names. Gajah Tunggal, Yingde Gases and MIE Holdings' fruitful refinancing efforts were rewarded with upgrades, while improving financial positions and diversification profile drove positive rating actions for West China Cement, Chandra Asri Petrochemical and Yuzhou Properties.

¨   Moving to negative rating actions, Noble Group downgrades continued into August with both Moody's and S&P cutting its respective ratings to Caa3 and CCC-, highlighting concerns that the commodity trader could default on its debt obligations as soon as the next 6 months as the planned asset sales by the group will not be enough to shore up its finances. IDBI Bank was downgraded by Moody's to B1/Sta, following a review for downgrade initiated in May. Despite receiving INR18.6bn and INR3.9bn of equity injection from the government and Life Insurance Corporation of India (LIC), the CET1 ratio of 6.5% remains below the 7.375% required by RBI for 2018. With loss expected reported for 2017 and asset quality issues persisting, Moody's sees limited room for further government support despite it being systemically important.

                                             

Outlook

¨   The global financial markets continue to be entrenched in geopolitics over the month, as the risk of overhanging fiscal inertia in the US continued with further major exit among the cabinet members of the US following the major shakeup that occurred in July, and rumours of the possible exit of Economic Advisor Gary Cohn. This while the executive continues to be embroiled in investigations into ties with members of the current administration with foreign powers, and as the US Treasury warns of an upcoming fiscal cliff unless the legislative passes a spending bill before the end of September. Geopolitical stress also emanated from Europe as August saw a terror attack in Barcelona and an ineffective meeting on Brexit between the UK and the EU; while in Asia, North Korea centred attention once more, as it launched ballistic missiles over Japan and threatening an attack on the Territory of Guam as all parties involved has been sabre-rattling. On a credit point of view, as we have expressed in previous reports, we still see a risk of overvaluation in the bond market, especially in the HY space as we see the UST curve continue to compress and credit spreads remain on a tightening trend. We would remain defensive on the Asia Pacific USD space, and would favour IG issuances over HY, where we see limited room for further strong performances. We have already seen the beginning of the tapering of issuance in Asia Pac in the month of August, as we had predicted and expect the weaker monthly supply for the rest of the year. For Malaysia however, we expect to see a continued strong pipeline issuances into the bond market, with the pent up supply still yet to be unleashed especially in the GG and financial institution space. The coming large maturities in government bonds for the coming two months and this increased supply would call for caution in the next two months.

 

Table 1: Index Movements

Indices	31-Aug	Changes (bps)
		1M	3M	YTD
iTraxx AxJ 5y IG	76.6	-5	-14	-39
AxJ IG Spread (bps)	172.3	-4	-4	-16
AxJ HY (%)	6.60	-19	13	-5
UST 2y	1.33	-2	4	14
UST 5y	1.70	-13	-5	-23
UST 10y	2.12	-18	-9	-33
SOR 2y (%)	1.32	6	-2	-44
SOR 5y (%)	1.74	1	-9	-66
SOR 10y (%)	2.22	0	-6	-68
MGS 3y (%)	3.36	4	8	-13
MGS 5y (%)	3.57	-13	1	-9
MGS 7y (%)	3.85	-5	4	-22
MGS 10y (%)	3.89	-10	1	-30
AAA 5y Spread* (bps)	55	-6	-18	-21
AAA 10y Spread* (bps)	75	8	-3	23
AA 5y Spread* (bps)	108	12	-3	-5
AA 10y Spread* (bps)	112	10	-1	17

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

 

 

 

 

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