FW: RHB FIC Credit Markets Monthly Review - 7/11/17

 

 

 

 

7 November 2017

 

Credit Market Monthly Review

October 2017

 

Budget 2018 Firmly on Track, Nomination of Powell as New Fed Chair to Reinforce Fed Policy Continuity

 

Market Review

¨   MYR Credit Market: Local govvies saw gyration in bond yields as investors stayed cautious ahead of nomination of new Fed Chair. Market players saw better clarity after it was announced that Jerome Powell to replace Janet Yellen as the new Fed Chair when Yellen's term ends in Feb-2018. On MoM basis, the benchmark 10y MGS inched a tad higher to 3.92% (+1bps) whereas the 3y MGS spiked +7bps to 3.46%. The MYR, on the other hand, ended the month at 4.23/USD (+0.2% MoM). The Malaysian bond market saw negative returns in September with the TR BPAM All Bond Idx returning -0.04% MoM (vs KLCI Total Return: -0.15%). Government bonds generally underperformed during the month of October at -0.12% while the other segments saw positive returns. We expect positive vibes from Budget 2018 to infuse renewed catalyst for the MYR bonds space, with fiscal consolidation firmly on track. Fiscal deficit is expected to narrow further to 2.8% of GDP in 2018. In terms of primary prints, October emerged as another strong primary issuance month with MYR13.3bn concluded, boosting YTD issuances for the year to reach MYR95.1bn.

¨   APAC USD Credit Market: US Treasuries on the rise as President Trump favours Jerome Powell; flattening of the UST yield curve in Oct. The US House of Representatives saw the passage of a 2018 budget resolution; Asian IG CDS via the iTraxx AxJ IG plummet to lows of 75.1bps; Asian credit markets continued to be mixed; IG spreads rallied -10bps MoM given second consecutive month of consecutive selloff in the USTs, whereas non-IG bond yields was unchanged at 6.64%; USD bond supply slows to USD24.2bn in October; declining 40% MoM; bringing the YTD print to USD276.8bn; Uptick in average upgrade/downgrade ratio rising to 0.57x.

 

Rating Trends

¨   Uptick in average upgrade/downgrade ratio rising to 0.57x from 0.31x in the prior month. Downgrades were evenly split between China and Indonesia. S&P lowered China Merchant Ports' given the company aggressive expansion efforts, while Shanxi Road & Bridge Construction Group Co Ltd was downgraded to BB- from BB as S&P expects a reduced level of government support, following a the Shanxi government's transport reform plan. Indonesia's Alam Sutera Realty and MNC Investama were both lowered to B and CCC respectively, both on negative outlook. The former on lower level of contracted sales, and limited prospects of growth, while the latter's higher financing risks prompted a re-rating. Elsewhere, Moody's concluded the review of Sime Darby Berhad's deleveraging plans, which resulted in the rating agency downgrading Sime by 2-notches from Baa1 to Baa3/Sta. Sime's demerger plans of its plantation and properties businesses which will reduce the benefits of diversification. Moreover, both businesses contribute to a larger share of profits to the group.

¨   Over to upgrades, Fitch upgraded Samsung Electronics to AA-/Sta, this follows Moody's outlook revision of the company's outlook to positive, rating affirmed at A1 in August, and equalizing with S&P's AA- following a similar upgraded in July. The company's operating and free cash flow generation is expected to remain robust given its strength and diversity of the company's businesses, which is not significantly vulnerable to foreseeable events. Ausdrill Ltd, meanwhile, was upgraded by both Moody's and S&P to Baa3 and BB- respectively, supported by the expectations of improved credit metrics over the near terms following new contracts, equity raising and business improvement initiatives.

                                             

Outlook

¨   The month started with unresolved geopolitical pressures from the rising tensions between the US and North Korea, and the independence ballot of the Catalonian region in Spain. These factors were largely ignored on the back of market focus on the tax reform plan by House Republicans, after intense discussions with the cabinet and following possible amendments, which was later resolved in the Tax Cuts and Jobs Act. Additionally, markets moved in anticipation of the new Fed Chairperson who was named by US President Trump in the beginning of November. Prospects of a December Fed hike remains on the card as we progress into next month. The 2y USTs have continued to drift higher, leading to a bear flattening of the yield curve. We had previously called for defensiveness on the Asia Pacific USD space, favouring IG issuances over HY, where we see limited room for further strong performances. We are reaffirming our views to underweight duration for the USD credit space by the end of the year. For Malaysia however, as we have previously signalled, strong pipeline issuances have been unleashed onto the bond market, with supply still expected especially in the GG, AAA government linked, and unrated names. This could be an opportunity to buy if prices are favourable especially in light of the slight correction in the MGS yield curve as it falls along with regional peer markets. We would continue to monitor latest developments in terms of foreign ownership of the MYR government bonds (though the stable MYR suggests renewed support is expected to emerge) as well as upcoming MGS/GII tenders as we progress into the final 2 months of 2017.

 

Table 1: Index Movements

Indices	31-Oct	Changes (bps)
		1M	3M	YTD
iTraxx AxJ 5y IG	75.1	-7	-7	-40
AxJ IG Spread (bps)	157.0	-3	-3	-18
AxJ HY (%)	6.64	0	-15	-20
UST 2y	1.60	12	25	41
UST 5y	2.02	8	18	9
UST 10y	2.38	5	9	-6
SOR 2y (%)	1.45	6	20	-30
SOR 5y (%)	1.88	2	13	-52
SOR 10y (%)	2.37	1	15	-54
MGS 3y (%)	3.46	7	14	-3
MGS 5y (%)	3.67	9	-2	2
MGS 7y (%)	3.94	10	3	-13
MGS 10y (%)	3.92	1	-7	-27
AAA 5y Spread* (bps)	65	-5	5	-10
AAA 10y Spread* (bps)	75	-9	8	23
AA 5y Spread* (bps)	97	-6	1	-16
AA 10y Spread* (bps)	110	-11	7	14

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

 

 

 

 

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