Yellen Signals March Rate Rise; Eye Heavy Maturity in the MGS Space

7 March 2017

Credit Market Monthly Review

February 2017

Yellen Signals March Rate Rise; Eye Heavy Maturity in the MGS Space   

Market Review

¨   MYR Credit Market: Govvies yields increased amid hawkish Fed. The MGS was supported in beginning of the month before the yields moved north after a series of hawkish Fedspeak bolstered the expectations of a Fed rate hike in Mar, despite little indication from the FOMC Minutes. The hawkish sentiment on the US front supported the strength of the greenback, which weakened the MYR by 0.27% MoM to 4.4405/USD in end-Feb.

Trading volume remained at MYR11bn in Feb as investors still focused in the short-dated bonds (<3yr bucket accounted for 41% of the trade), although activities in the 3-5y and longer bracket were picking up as proportion of total trading activities. The quasi segment remained as the top traded (40% of total trades) where newly issued GovCo ’24-32 gained as yields fell 8-11bps below coupon, followed by AAA segment (20% of total trades), while we saw increasing activities in banks’ subordinated debts from Public Bank, RHB, HLB, and HSBC. Primary issuance picked-up in Feb. Issuers returned to the market with total issuance of MYR6.4bn during the month, after a quiet Jan of MYR1.5bn. GovCo is the first GG issuer this year with total issuance of MYR3bn across 5y-15y.

¨   APAC USD Credit Market: UST rallied in February despite the hawkish rhetoric during the month. February has seen another month of strong US economic data which fuelled hawkish comments by Fed members Dudley, Kaplan, Williams, Powell, Harker, Brainard as well as Fed Chair Yellen despite the weak tone from the February FOMC minutes and the political uncertainties in Europe. New supply remained positive with USD14.2bn worth of deals priced in February.

Rating Trends

¨   Average upgrade/downgrade ratio of 0.67x against January’s 1.06x. Among the 12 downgrades, were familiar troubled credits like Gajah Tunggal and Parkson Retail Group. The former with on-going refinancing concerns and latter a consequence of weak profitability and cash flows. Heightened business risk following merger and acquisition activities led to a cut in credit rating of Beijing Enterprises, while IDBI suffered a downgrade in ratings by S&P due to its weak asset quality, with sizeable exposures to the vulnerable corporate and infrastructure segment. On upgrades, we continue to observe more commodity companies being upgraded or outlooks revised to positive/stable. SK Innovation received a 1-notch upgrade driven by health earnings and expectations of gradual debt reduction. POSCO’s outlook was revised to positive from stable and JSW Steel was revised to stable from negative. Furthermore, Moody’s upgraded the outlook of multiple Indonesian government linked corporates to positive from stable following a similar rating action on the Indonesian sovereign. Other significant rating action was the downgrade review by Moody’s on Sime Darby’s Baa1 ratings after the group announced its plans to list its plantation and property business, reducing business diversification, scale and cash flow generating capacity.

Outlook

¨   Investors to keep an eye on the coming FOMC meeting on the 16-Mar, where the implied future probability has already priced in a 94% chance of a rate hike in the Mar FOMC meeting, after Fed members Dudley, Kaplan, Williams, Powell, Harker, and Bainard as well as Fed Chair Yellen, in their respective speeches over the week expressed hawkish views on the economy and the need to hike rates sooner, than later, further spurring market expectations. The softer tone of President Trump’s speech to the Congress was well-received by the market, however investors will still have to wait more detail of his fiscal spending and broader tax plan. Other key events such as China’s National People’s Congress (5-Mar) and Dutch Election (15-Mar) will also be closely monitored during the month. These event risks could affect the sentiment for the domestic bonds, where another heavy maturity of MYR10.5bn from MGS 3/17 on the 15-Mar along with 3 auctions during the month – 5y New MGS 3/22, 15y Re-opening GII 8/33, and 7.5y New MGS 9/24.

Table 1: Index Movements

Indices	28-Feb	Changes (bps)
		1M	3M	YTD
iTraxx AxJ 5y IG	95.8	-20	-30	-20
AxJ IG Spread (bps)	174	-5	-11	-12
AxJ HY (%)	6.43	-30	-11	10
UST 2y	1.26	6	15	7
UST 5y	1.93	2	9	0
UST 10y	2.39	-6	1	-5
SOR 2y (%)	1.57	0	-1	-19
SOR 5y (%)	2.09	-9	0	-31
SOR 10y (%)	2.56	-11	-10	-34
MGS 3y (%)	3.30	3	-55	-27
MGS 5y (%)	3.69	6	-34	-3
MGS 7y (%)	3.94	1	-21	-19
MGS 10y (%)	4.04	-9	-32	-18
AAA 5y Spread* (bps)	61	-3	-2	-11
AAA 10y Spread* (bps)	62	-6	-6	-11
AA 5y Spread* (bps)	98	-5	-5	-7
AA 10y Spread* (bps)	102	-7	-7	-10

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

This message is intended only for the use of the person(s) to whom it is addressed and may contain information that is privileged or otherwise protected from disclosure. If you are not the intended recipient you are hereby notified that any use, review, disclosure or copying of this message and the information it contains is prohibited. If you receive the message in error, please notify the sender by reply e-mail and discard all its contents.   Thank You.