Fixed Income Research KDN PP 16084/10/2012 (030859)

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1 Fixed Income Research KDN PP 684//22 (3859) J A N U A R Y 2 7 FINANCIAL VARIABLE DEC-6 JAN-7 MOM CHNG OVERNIGHT POLICY RATE (%) bp 3-YEAR BENCHMARK MGS (%) bps -YEAR BENCHMARK MGS (%) bps 3-YEAR IRS (%) bps -YEAR IRS (%) bps RINGGIT 3-YEAR AAA (%) bps RINGGIT 3-YEAR AA (%) bps RINGGIT 3-YEAR A (%) bps 2-YEAR US TREASURY (%).9.2 bp -YEAR US TREASURY (%) bp -YEAR UK GILTS (%) bps -YEAR GERMAN BUND (%) bps MYR/USD % KLCI INDEX,64.73, % Analyst Global Markets 2 In January, global markets continued to be dominated by political headlines tied to the implementation of policies by newly elected US President Donald Trump. It is worth noting the bond market was under the influence of two opposing forces: reflation trade amid high expectations of pro-growth policies under the Trump administration versus his protectionist rhetoric that spurred safe haven demand. Tan Jack Fong Analyst jackfong@marc.com.my Lee Si Xin Associate sixin@marc.com.my Ringgit Bonds 3 The local govvies market continued to be in positive territory in January, buoyed by buying interest as the strength of the US dollar (USD) began to waver amid increasing uncertainties about policies under Trump s administration in the US. Local govvies were also aided by the recovery in global crude oil prices due to Organisation of the Petroleum Exporting Countries (OPEC) -led production cuts. In other developments, Bank Negara Malaysia (BNM) held the Overnight Policy Rate (OPR) at 3.% in its January Monetary Policy Committee (MPC) meeting. Currency 4 The ringgit strengthened against the USD in January, rising.3% month-on-month (mo-m) to RM4.4285/USD. Trump s emphasis on protectionist policies, talking down the USD and stabilisation of global crude oil prices aided the rebound of the ringgit against the greenback. However, the ringgit was traded lower against other major currencies. Summary of Corporate Bond Issuances and Outstanding 5 Secondary Market Activities 6 MARC Rating Activities in 27 YTD 6

2 Market Review Global Markets In January, global markets continued to be dominated by political headlines tied to the implementation of policies by newly elected US President Donald Trump. It is worth noting the bond market was under the influence of two opposing forces: reflation trade where investors shifted their funds from bonds to stocks against the backdrop of fiscal stimulus under the Trump administration versus his protectionist rhetoric that spurred safe haven demand. US Treasury (UST) yields mostly ended little changed over the course of the month amid choppy trading, with the -year yields settling at 2.45%. Despite the political noise, US economic data releases in January were mostly upbeat. Notably, sentiment surveys surprised on the upside with the University of Michigan s consumer sentiment for the US rising to a 3-year high of Concurrently, the Institute for Supply Management (ISM) s Manufacturing PMI climbed to 56, the highest since November 24. Although the 4Q26 US real gross domestic product (GDP) growth came in lower-than-expected at.9% year-on-year (y-o-y) on trade drag, an upturn in business spending has sparked some optimism about the US economy in the near future. In the eurozone, a sharp turnaround in inflation from -.2% year-on-year (y-o-y) in April 26 to.8% y-o-y in January 27 amid rising commodity prices, sparked a significant sell-off in European government bonds, resulting in a 25 basis points (bps) jump in the -year German bund yields at January s close. Speculation grew among investors that the European Central Bank (ECB) will be forced to trim its monetary stimulus sooner than it intended, despite ECB President Mario Draghi s cautious comments on the sustainability of the rise in inflation. In addition, rising political risks emanating from the upcoming elections have pushed yields for the -year French and Italian government bonds higher by 37 bps and 52 bps, respectively. The UK gilts reversed gains as UK Prime Minister Theresa May s much anticipated speech on Brexit provided no fresh grounds for concerns about its damage to the UK s trade relations. Although May reiterated her commitment to leave the single market as well as the customs union granted under the European Union (EU) membership, she has vowed to seek a free trade agreement with the EU after Brexit. Meanwhile, the Supreme Court has confirmed that parliamentary approval is required to formalise the UK s departure from the EU. The UK Gilts resumed its fall after the court ruling, reflecting market belief that it would not derail the UK government from embarking on Brexit procedures. Exhibit : US Treasuries traded flat in January, capping losses spurred by Trump s victory in the US elections Exhibit 2: Core European bonds came under pressure amid improved inflation outlook Trump's victory in the US election 2Y UST (%, LHS) FOMC raised interest rates Y UST (%, RHS).7 Nov-6 Dec-6 Jan-7 UK Prime Minister speak on Brexit Trump's inauguration as the new US president Y German bunds (%, RHS) Y France Oat (%, RHS). Y UK gilts (%, RHS) Y Italy bond (%, RHS) Nov-6 Dec-6 Jan

3 Ringgit Bonds The local govvies market ended January in positive territory for the second consecutive month, albeit at a slower pace. During the month, as expected, BNM decided to hold the OPR at 3.% in its MPC meeting, while yields on local govvies slowly crept up ahead of US president Donald Trump s inauguration. Demand for local govvies began to increase when the USD started to weaken, caused by increasing uncertainties stemming from Trump s policies in the final week of January as Trump placed more focus on protectionist policies and offered no concrete details on future fiscal spending plans. Local govvies were also supported by the recovery in global crude oil prices due to OPEC-led production cuts. At end-january, trading volume rose to RM53.2 billion compared to RM46.5 billion in the previous month. The benchmark Malaysian Government Securities (MGS) yield curve bull-steepened with yields 3 bps lower on the three-year note, nine bps to 2 bps lower on the five-, seven- and -year notes, and seven bps to 3 bps lower on the 5- and 2-year notes. The /3 MGS spread was seen widening to 86 bps as compared to 65 bps recorded in the preceding month. The benchmark yield on the -year MGS declined to 4.2%, nine bps lower than the previous month. In the primary market, a total of RM.5 billion was raised in January through three government offerings as compared to RM.5 billion through one offering in the preceding month. The three offerings, namely the three-year re-opening of the Government Investment Issue (GII), the 5-year re-opening of the MGS and the.5-year new issue of the GII raised RM3.5 billion, RM4. billion and RM4. billion, respectively. Bidding interest for the three-year re-opening of the GII paper was low as it drew a bid-to-cover (BTC) ratio of.8x due to little-to-non-existent foreign interest. However, demand for local govvies started to pick up for the next two issues as market sentiment started to improve and the USD continued to soften. Both the 5-year re-opening of the MGS and the.5-year new issue of the GII drew BTCs of 2.5x and 3.4x, respectively. In January, foreign holdings of ringgit bonds fell for the third consecutive month albeit at a slower pace, to RM2.7 billion (December: RM25.6 billion) with 79.3% of the outflow attributed to local govvies. Foreign holdings in the MGS and the GII shrank to RM66.4 billion (December: RM68.5 billion) and RM2.5 billion (December: RM2.5 billion), respectively, contributing to the.6% m-o-m drop in total foreign holdings in local govvies. Foreign holdings of the MGS outstanding in the market fell to 46.% in January, compared to 47.% in December, while foreign holdings of the GII outstanding fell to 8.5% from 9.2% in the same period. BNM s measures to curb speculation in the ringgit continued to discourage foreign demand in local govvies despite the ringgit gaining some ground in January. Exhibit 3: MGS yield curve m-o-m change (RHS) end-december (LHS) end-january(lhs) % bps Maturities (Years) Exhibit 4: Foreign inflows & outflows of ringgit bonds RM million Total ST Papers Total Govvies and Corporate Bonds 5, Inflows, 5, -5, -, -5, -2, Outflows -25, Jan-5 Feb-5 Mar-5 Apr-5 May-5 Jun-5 Jul-5 Aug-5 Sep-5 Oct-5 Nov-5 Dec-5 Jan-6 Feb-6 Mar-6 Apr-6 May-6 Jun-6 Jul-6 Aug-6 Sep-6 Oct-6 Nov-6 Dec-6 Jan-7 Source: BNM Bond Info Hub, 3

4 Currency The ringgit had strengthened against the USD in January, trading higher by.3% m-o-m at RM4.4285/USD compared to RM4.4862/USD previously. The ringgit traded as low as RM4.4975/USD against the USD on 4 th January but had since rebounded as the strength of the greenback began to waver. The USD fell as the greenback was hit by a loss of confidence in US trade relations. The USD index was weaker by 2.64% m-o-m at 99.5 in January in comparison with 2.2 recorded in December. This was mainly due to growing uncertainties over Trump s fiscal policies as he emphasised on protectionism and employing a tough stance on immigration. Trump also talked down the USD as he deemed the greenback was too strong and blamed various countries for devaluing their respective currencies. The rise in the ringgit was also aided by stabilising global crude oil prices as production cuts by OPEC members offset the rise in US crude inventories. The ringgit traded lower against the Japanese yen, the Singapore dollar, the euro, and the pound sterling on a monthly basis, to RM3.926 per JPY, RM3.88, RM4.7384, and RM from RM per JPY, RM3.8, RM4.723, and RM5.52, respectively. Exhibit 5: Asian currencies against USD (% M-o-M) Philippine Peso Singapore Dollar Hong Kong Dollar Indian Rupee Indonesian Rupiah Malaysian Ringgit Thai Baht Offshore Chinese Renminbi Japanese Yen Taiwanese Dollar South Korean Won USD strengthened USD was traded lower against most of the Asian currencies USD weakened 4.9 Exhibit 6: Major currencies against MYR (% M-o-M) Hong Kong Dollar USD Indonesian Rupiah Swiss Franc Taiwanese Dollar Pound Sterling Euro Singapore Dollar Thai Baht Offshore Chinese Renminbi Japanese Yen South Korean Won Australian dollar MYR strengthened Ringgit was traded lower against most major currencies MYR weakened

5 Summary of Corporate Bond Issuance and Outstanding Exhibit 7: Historical trend of bond issuance by category (RM billion) Year Unrated Corporate Bonds Unrated Government Guaranteed Total Unrated Rated Corporate Bonds Cagamas Total Rated Total Corporate Bonds YTD Source: BPAM, Note: Numbers may not necessarily add up to total due to rounding. January saw muted issuance activity in the local corporate bond market. Total gross issuance fell to RM.6 billion from RM4.2 billion in the preceding month, the lowest monthly issuance since February 25 (RM.3 billion). Both the unrated and rated (which includes Cagamas) segments fell, the former to RM.3 billion (December: RM2. billion) and the latter to RM.3 billion (December: RM2.2 billion). Exhibit 8: Corporate bonds outstanding: Distribution by rating band AAA 27% AA 43% Gross issuance in the unrated corporate bond segment was led by KL 33 Properties Sdn Bhd s nine tranches of Medium-Term Notes (MTNs) totalling RM. billion. Elsewhere, Rantau Abang Capital Bhd s issuance of RM. billion single-tranche Islamic Medium-Term Note (IMTN) led gross issuance in the rated corporate bond segment. There were no issuances from both the unrated government guaranteed (GG) (December: RM.2 billion) and Cagamas (December: no issuance) segments in January. Cagamas 6% Short Term 2% Not Rated 6% Source: BPAM, BBB & Below 2% A 4% Exhibit 9: Outstanding size of sovereign, Cagamas and corporate bonds as of January 27 (RM billion) Asset Class Conventional Islamic Total Exhibit : Corporate bonds outstanding: Conventional & Islamic Sovereign Cagamas Corporate Bonds Corporate Corporate Guaranteed Financial ABS Source: BPAM, Source: BPAM, 5

6 Secondary Market Activities Exhibit : Secondary market volume (RM billion) Asset Class Dec-6 Jan-7 MoM Chng MGS/GII Cagamas.5..5 FI Corporate Non-FI Corporate Source: BPAM, Exhibit 2: Non-FI corporate traded by rating band (RM billion) Rating Band Dec-6 Jan-7 MoM Chng AAA AA A BBB and below... Short term..2.2 Source: BPAM, MARC Rating Activities in 27 YTD Exhibit 3: List of rating actions in January 27 Principle Category Main Sector Issuer Date Announced Rating Action Rating Outlook Long-Term Rating Short-Term Rating Before After Before After Issue Size (RM mil) Credit Enhancement Islamic Project Finance Trading/Services Alpha Circle Sdn Bhd 6-Jan-7 AFFIRMED STA AA- AA- 54 Islamic Project Finance Trading/Services Alpha Circle Sdn Bhd 6-Jan-7 AFFIRMED STA A A 55 Islamic Corporate Debt Finance Cagamas Bhd 9-Jan-7 AFFIRMED STA AAA AAA 4, Islamic Corporate Debt Finance Cagamas Bhd 9-Jan-7 AFFIRMED STA AAA AAA 4, Islamic Corporate Debt Finance Cagamas Bhd 9-Jan-7 AFFIRMED STA MARC- MARC-, Islamic Corporate Debt Finance Cagamas Bhd 9-Jan-7 AFFIRMED STA MARC- MARC- 2, Conventional Corporate Debt Finance CIMB Bank Bhd -Jan-7 WITHDRAWN STA AA AA 4, Conventional Corporate Debt Trading/Services KMCOB Capital Bhd 6-Jan-7 AFFIRMED STA AAA AAA 32 fg Islamic Corporate Debt Infrastructure & Utilities Northport (Malaysia) Bhd -Jan-7 AFFIRMED STA AA- AA- MARC- MARC-,5 Islamic Corporate Debt Infrastructure & Utilities Petronas Dagangan Bhd 2-Jan-7 AFFIRMED STA AAA AAA MARC- MARC- 2, Islamic Corporate Debt Property Putrajaya Holdings Sdn Bhd 6-Jan-7 AFFIRMED STA AAA AAA 2,2 Islamic Corporate Debt Property Putrajaya Holdings Sdn Bhd 6-Jan-7 AFFIRMED STA AAA AAA,5 Islamic Corporate Debt Property Putrajaya Holdings Sdn Bhd 6-Jan-7 AFFIRMED STA AAA AAA 3, Islamic Corporate Debt Property Putrajaya Holdings Sdn Bhd 6-Jan-7 AFFIRMED STA AAA AAA 37 Islamic Corporate Debt Property Symphony Life Berhad (fka Bolton Bhd) 7-Jan-7 WITHDRAWN STA AAA AAA 23 fg Conventional Corporate Debt Trading/Services Tesco Stores (Malaysia) Sdn Bhd -Jan-7 WITHDRAWN STA AA- AA- 3,5 cg Islamic Project Finance Infrastructure & Utilities TNB Western Energy Bhd 27-Jan-7 AFFIRMED STA AAA AAA 4, Source: BPAM, *cg corporate guarantee *fg financial guarantee 6

7 Exhibit 4: YTD MARCWatch placements, by issue count MARCWatch NEG MARCWatch DEV DEC- DEC-2 DEC-3 DEC-4 DEC-5 DEC-6 JAN-7 Source: BPAM, Exhibit 5: YTD upgrades, downgrades and defaults, by issue count Upgrades Downgrades Defaults 22 7 Source: BPAM, YTD 3 4 Exhibit 6: List of rating migrations YTD Principle Category Main Sector Issuer Date Announced Rating Action Rating Outlook Long-Term Rating Short-Term Rating Issue Size (RM mil) Before After Before After Credit Enhancement Source: BPAM, 7

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