Weak Demand for 20y MGS Auction; Geopolitics on the Forefront

7 April 2017

Credit Markets Update

                                               

Weak Demand for 20y MGS Auction; Geopolitics on the Forefront

MYR Credit Market:

¨      Subdued demand for 20y MGS 4/37 auction after hawkish FOMC minutes. The 20y New MGS 4/37 auction, which priced at average yield of 4.762%, attracted merely 1.59x BTC yesterday, the second lowest this year after 5y MGS auction last month. Investors generally reacted to the FOMC minutes with clear signs that the Fed is close to shrink its USD4.5trn balance sheet later this year, while various economic prints also pointed toward a solid job number. We expect investors continue monitoring the development from Trump-Xi Jin Ping meeting and the latest bombing in Syria. Benchmark yields moved sideways yesterday with the 3y settling at 3.52% (-0.1bps) while 10y ended the day at 4.12% (+0.6bps). The MYR weakened 0.13% to 4.437 against the greenback.

¨      Financial names top trading chart. Volume totalled MYR321m yesterday, 66% higher trading activities compared to the day earlier. Notably, Maybank IT1 callable 9/18 rose 1bp to 4.84% with MYR100m dealt yesterday. Yields for Banks’ T2 ended lower from UOB 25c20 (-1bp to 4.50%) and Affin Bank 27c22 (-1bp to 5.14%), each on MYR20m trades. Elsewhere, short-dated Cagamas MBS 8/17 realigned 14bps higher 3.75%, while Khazanah 3/20 rose 1bp to 4.03%.

APAC USD Credit Market:

¨      UST ended flat, despite the rally in the market seen in the beginning of the day. Benchmark 10y UST yields settled at 2.34%, while the 2y closed at 1.24%. The focus of the market remains on the development of the Trump-Xi meeting to give directions on regional geopolitics and trade relations and the new increased geopolitical tensions following the recent bombing of Syria by the US. Bond yields are expected to see support in the short term. Moving forward, investors will be eyeing the non-farm payrolls and unemployment data. Brent, meanwhile, gained approximately 1% to USD54.89/bbl as market participants watch upcoming data on the US crude oil supply.

¨      Steady credit markets. IG spreads inched 1.6bps higher to 175.9bps, while average HY yields was unchanged at 6.42%. The iTraxx AxJ IG spreads traded a tad higher to 95.5bps driven by IDBI Bank, Hutchinson Whampoa and China Development Bank.

¨      In the primaries, RH International Finance Ltd (issue rating: NR, guarantor: Regal Hotels International Holdings Ltd) issued USD225m Pnc5 bond at 6.5% against its IPT at 6.875% area. Modernland Overseas Pte Ltd (B2/B/B) priced USD240m 7NC4 bond at 6.95%, compared to its IPT at 7.125% area, with BTC of 2.3x. Elsewhere, Yancoal International Resources Development Co. (issue rating: NR/B+/NR) sold USD500m Pnc3 at 5.75%, its IPT was at 6.25% area.

¨      S&P downgraded Jiangsu New Headline Development (NHL), a construction service provider and its subsidiary, HK Zhiyuan’s LT rating to BB and BB- respectively. This action is to reflect the ultimate owner of these companies, Lianyungang municipal government’s elevated leverage will affect the companies’ credit profile over the next 12-24 months.  S&P expects that the city’s tax-supported debt will exceed 270% of the city-level operating revenues. Elsewhere, Fitch upgraded PT Indika Energy Tbk’s LT rating from CCC to B- following the successful refinancing. The note issue is likely to improve Indika’s liquidity and its cash flow generation should improve along with higher coal prices. Fitch’s price assumptions for 2017 thermal coal increased from USD57/mt to USD70/mt.

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