Credit Market Watch: Summary for week ending 20-May

Credit Market Watch: Summary for week ending 20-May

·         MYR Credit:

Ø  MGS yield curve unchanged to about 1bp higher along the 5y15y WoW as less dovish than expected MPC statement reversed gains slightly. Quasis had strong buying flows with yields down by 1-5bps WoW while elsewhere in the PDS space yields rose 1-4bps and as much as 11bps at the AA3/AA- 15y point.

Ø  Inflation & external reserves: April's headline and core inflations printed lower at 2.1% and 2.3%, bring YTD average to 3.2% and 3.3% respectively. Consequently, our economic research has revised down 2016 forecast range to 2.7-3.2% from 3.0-3.5%. Foreign reserves rose to USD97.2b as at 13 May (30-Apr: USD97b) with a YTD gain of USD1.9b.

Ø  Base rates (BR) raised: Public Bank, HL Bank and Stanchart all lifted their BRs by 10bps despite the 3M KLIBOR has been easing downward. Our banking analyst attribute this to funding costs pressure amid stiff competition for deposits and tighter liquidity. To recap, banking deposit base contracted 0.9% YoY in March and yet banks e.g. Public Bank has a 7-8% deposit growth target for 2016 thus intensifying competition.

Ø  Relative value: UEMS 22 offered value last trading 6bps the AA3/AA- fitted line. The new UEMS 23 which was priced at 5.00% has a potential to trade in the 4.85-4.90% as our fitted shows 4.87% at the 7y point.

·         Asian USD Credit:

Ø  UST curve shifted 13-16bps higher along the 2y10y WoW as the probability of US FFR hike in June rose from near zero to around 30% after the minutes. This week on 23 May, St Louis Fed Bullard (voter) will speak about economy and monetary policy in Beijing.

Ø  In Asian credit, spreads tightened but prices generally came down because of the UST move. On spreads, JACI composite -6bps, JACI IG -5bps and JACI HY -12bps WoW. Sovereign curves shifted higher WoW led by higher-beta INDON which was up 12-18bps while MALAYS and KOREA curves rose 12-15bps.

Ø  Rating changes: 1) Beijing Capital Group's rating was downgraded to Baa3/negative by Moody's, citing high leverage as a result of debt-funded expansion and the progress on its asset disposal plans including non-core assets is slower than expected; adjusted debt increased 31.8% YoY to RMB122.6b at end-2016 while adjusted net debt/EBITDA was higher at 8.7x at end-2015 (end-2014: 7.2x). 2) China's Minmetals was downgraded to Baa1 from A3 with a negative outlook by Moody's, citing weak earnings and deterioration in credit metrics due to volatility in base metal prices although the company continues to benefit from 5 notches uplift from its baseline credit assessment due to very high likelihood of support from the Chinese government.

·         CDS: EM Asia 5y CDS spreads reported mixed movements, with Indonesia +7bps and Malaysia +4bps while China -2bps and Korea -1bps WoW.

Thank you.