Fixed Income Research KDN PP 16084/10/2012 (03089) A U G U S T 2 0 1 4 FINANCIAL VARIABLE JUL-14 AUG-14 MoM CHNG Overnight Policy Rate (%) 3.2 3.2 0 bps 3-year Benchmark MGS (%) 3.0 3.2 2 bps 10-year Benchmark MGS (%) 3.89 3.93 4 bps 3-year IRS (%) 3.87 3.89 1 bps 10-year IRS (%) 4.39 4.28-11 bps Ringgit 3-year AAA (%) 3.91 3.9 4 bps Ringgit 3-year AA (%) 4.31 4.33 1 bps Ringgit 3-year A (%) 6.28 6.24 - bps 10-year US Treasury (%) 2.6 2.34-21 bps 2-year US Treasury (%) 0.3 0.49-4 bps MYR/USD 3.197 3.120-1.4% KLCI Index 1871.36 1866.11-0.3% S&P 00 Index 1930.67 2003.37 3.8% Source: Bloomberg, Global Markets 2 According to the Bloomberg US Treasury Bond Index (BUSY), US government debt returned 1.3% in August, the highest since January this year. Strong buying interest was seen for longer-dated papers as heightened geopolitical concerns in Ukraine and Gaza, coupled with a less optimistic euro zone outlook and lingering sentiment that the European Central Bank (ECB) was preparing further stimulus policy, boosted the allure for safe haven assets. Ringgit Bonds 2 In the local govvies market, focus of the month was the release of Malaysia s second quarter 2014 GDP growth, which accelerated to its fastest pace (2Q2014: 6.4% y-o-y; median estimates:.8% y-o-y) in six quarters on stronger export growth. The benchmark MGS yields were seen ticking higher across all tenures as investors cheered the news by pouring money into riskier assets and shrugging off ongoing crises in Ukraine and, to a lesser extent, Gaza. Analysts Nick Lee, CFA Senior Analyst nick@marc.com.my Raja Zarina Analyst zarina@marc.com.my Currency 2 The ringgit posted monthly gains for four straight months against the dollar and also advanced against other major currencies, thanks to a better-than-expected headline second quarter 2014 GDP growth. The local note strengthened to near its 10-month high of 3.16 after the release of the GDP report. Topic of the Month Examining Output Gap in Interest Rate Setting 3 Summary of Corporate Bond Issuance and Outstanding 4 Secondary Market Activities MARC Rating Activities in 2014 YTD Please read the disclaimer on the last page of this report
Market Review Global Markets US treasury yields were seen tumbling across the curve and hitting fresh lows. According to the Bloomberg US Treasury Bond Index (BUSY), US government debt returned 1.3% in August, the highest since January this year. Strong buying interest was seen for longer-dated papers as heightened geopolitical concerns in Ukraine, and to a lesser degree in Gaza, continued to boost the allure for safe haven assets. Benchmark yields of the 10- and 30-year fell more than seven bps after Ukraine said its troops attacked a military convoy that entered the country from Russia. A less optimistic euro zone outlook and lingering sentiment that the ECB was preparing further stimulus policy to spur the economy amid signs of destabilizing consumer prices and flagging economic growth also prompted flight to quality bids, leading to a broad rally in the euro zone government bond market. As such, the UST offered superior value compared to lower yields in Germany, attracting investors for relative values. On a monthly basis, the UST 10-year yield shed 21 bps to close at 2.34%, the biggest monthly gain recorded since May 2012. The left wing of the curve was also well supported as downbeat jobs data somewhat reassured investors that interest rates will stay low for some time. Federal Reserve Chairwoman Janet Yellen, during the Jackson Hole Economic Policy Symposium in Wyoming, signalled that the country s labour markets still have to heal further before the economy can withstand higher interest rates. The UST twoyear yield clawed back July s losses to close four bps lower at 0.49%. The euro zone bond market advanced with the benchmark 10-year sovereign yields seen falling to record lows in Spain, Germany and Italy, aided by the prospect of further stimulus by the ECB. The Bloomberg Eurozone Sovereign Bond Index closed the month at 130.12, the highest level on record since the index was first introduced in 2010. The yields spread of the Spanish 10-year and the Italian 10-year against the German bund with similar maturity narrowed to 134 bps and 14 bps from 222 and 219 respectively beginning of the year. Ringgit Bonds Moving to the local market, focus of the month was the release of Malaysia s second quarter GDP growth data, which accelerated to its fastest pace (2Q2014: 6.4% y-o-y; median estimates:.8% y-o-y) in six quarters on stronger export growth. The benchmark MGS yields were seen ticking higher across all tenures as investors cheered the news by pouring money into riskier assets and shrugging off the ongoing crises in Ukraine and to a lesser extent, Gaza. However, attempts to push the yields much higher were seen thwarted by the prospects of further monetary policy easing by the ECB which prompted the flight-to-safety. At close, the benchmark 10-year yields climbed four bps to 3.93%. Meanwhile, despite lingering concerns of another round of interest rate hike by Bank Negara Malaysia (BNM), trading momentum in the govvies space was seen picking up in August, rising to RM48.7 billion in August from RM47.6 billion in July, partly attributed to the higher amount of MGS and GII auctions. In the primary market, there were three government offerings last month i.e. the RM3. billion seven-year reopening of the MGS, the RM3.0 billion 10-year reopening of the GII and the RM1.0 billion 10-year reopening of the Sukuk Perumahan Kerajaan (SPK). The seven-year reopening of the MGS and 10-year reopening of the GII garnered decent demand with bid-to-cover ratios of 2.00 and 2.60, respectively. Average yields were recorded at 3.803% for the former and 4.268% for the latter. The auction for the 10-year reopening of the SPK saw a firm demand, with a bid-to-cover ratio of.9x, partly due to its small issuance amount. The average yield came in at 4.268%. Meanwhile, foreign holdings of MGS surged to a record high of RM14 billion in July, from the RM147.3 recorded in June. Percentage-wise, foreign holdings of MGS to total outstanding also edged higher to 48.3%, the highest since May 2013. Currency The ringgit posted monthly gains for four straight months against the dollar and also advanced against other major currencies, thanks to the better-than-expected headline second quarter 2014 GDP growth. The local note strengthened to near its 10-month high of 3.16 after the release of the GDP report. However, the upside strength of the ringgit petered out a little as some upbeat US economic data lent some support for the US dollar. At close, the ringgit rose 1.4% to 3.120 against the dollar, strengthened 2.9% to 4.136 against the euro and advanced 3.0% to.2317 against the British pound. 2 www.marc.com.my
Examining Output Gap in Interest Rate Setting Chart 1.0: Contribution to GDP Growth Chart 2.0: Output Gap, Inflation and OPR Source: Bloomberg, Malaysia s 2Q2014 GDP continued to surprise markets on the upside. Beating consensus forecasts of +.8%, 2Q GDP grew respectably at 6.4% y-o-y and 1.8% q-o-q, bolstered by strong external demand. Real exports of goods and services surged 8.8% y-o-y (1Q2014: +7.9% y-o-y), outpacing growth in real imports of 3.9% y-o-y (1Q2014: +7.1% y- o-y), thus resulting in a significant contribution of net trade to GDP of 4. percentage points (1Q2014: 1.3 percentage points). Despite strong headline growth, domestic demand however, showed signs of cooling down (2Q2014: +.7% y- o-y, 1Q2014: 7.4% y-o-y). Resilient private investment (2Q2014: +12.1% y-o-y, 1Q2014: +14.1% y-o-y) was offset by a drop in public investment (2Q2014: -3.3%, 1Q2014: -6.4%) and government spending (2Q2014: -1.3%, 1Q2014: +11.2%). Private consumption in the second quarter was weak (see chart 1.0), falling for three straight quarters (2Q2014: +6.%, 1Q2014: 7.1%), which reinforced our view that the BNM will not be in a hurry to tighten interest rates in its next policy meeting. To further investigate the impact of growth on monetary implications, we extend our analysis by observing the trend in output gap, a commonly used indicator of economic activity a gauge of deviation of the economy from its productive potential level (full capacity) or to put it simply the difference between what an economy is producing and what it can produce. Conceptually speaking, by subtracting potential output from actual output, a positive output gap implies an overheating economy and upward pressure on inflation, while a negative output gap, in contrast, implies a slack in an economy and downward pressure on inflation. Thus in theory, a positive output gap might prompt policymakers to cool an overheating economy by raising interest rates, while a negative output gap might prompt monetary stimulus. We acknowledge the shortcomings of using output gap in determining the course of monetary policy settings as there are many other variables that come into play, hence the analysis is exercised and interpreted with caution. In addition, we also note the difference in methodology adopted would lead to different results from one study and another. Taking real GDP as a proxy of actual output, we estimate the potential GDP using a purely statistical, univariate technique, and widely used in the literature the Hodrick-Prescott filter. A quick glance at the results (see Chart 2.0), nevertheless, suggests that the findings conform to theory positive output gap in high inflation environment; negative output gap in low inflation environment. We observe there are periods (although not all the time) when the interest rate hike took place after the economy ran positive output gap in the previous quarters. Our findings signal the output gap is turning into positive territory in the second quarter. However, we opine that the level (only 0.1% of GDP) is still too low to warrant an interest-rate tightening, compared with levels when the interest rate hike actually occurred in June 2011. Besides, other indicators i.e. subdued headline inflation (July: 3.2%; June: 3.3%) and a continued decline in loan growth to household sector (July: 11.1%; June 11.%) also point to weakening private consumption. In our view, a further increase in the interest rate could potentially hurt the consumer sector and the growth trajectory. That being said, we maintain our forecast that the earliest rate hike could come in the 1Q201 unless GDP growth continues to surprise on the upside in 3Q2014. 3 www.marc.com.my
Summary of Corporate Bond Issuance and Outstanding Historical Trend of Bond Issuance by Category (RM billion) Year MGS/GII Unrated Corporate Bonds Rated Corporate Bonds Unrated Government Guaranteed Cagamas Total Corporate Bonds 2008 60.0 3.2 40.38 6.80.0.74 2009 88. 7.49 31.39 13.8 8.31 61.03 2010 8.1 6.03 3.99 4.73 6.33 3.07 2011 93.3.20 47.63 1.02 2.80 70.63 2012 96.2 13.44 76. 30.38 3.42 123.79 2013 92. 12.33 2.38 13.6 7.90 86.17 2014 YTD 6. 3.1 34.0 1.0 1.1 3.1 Source: BPAM, In August, the local corporate bond market raised a total of RM4.0 billion, less than half the amount raised in July (RM9.0 billion), dragged by a slowdown of issuances in rated (August: RM2.6 billion; July: RM6.3 billion) and unrated government-guaranteed segments (August: RM1.0 billion; July: 2. billion). There were only two quasi-government securities issued in the unrated government-guaranteed segment last month, both of which were raised by Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN). Meanwhile, last month saw a 0% decline in the issuance of rated corporate bonds. A large drop in the segment was mainly attributed to lower issuances in the financial services sector (August: RM0.6 billion; July: RM3.7 billion) and no issuance in the infrastructure & utilities sector (August: none; July: RM2.0 billion). Outstanding Size of Sovereign, Cagamas and Corporate Bonds as of June 2014 (RM billion) PDS outstanding: Distribution by Rating Type Source: BPAM, PDS outstanding: Conventional & Islamic Asset Class Conventional Islamic Total Sovereign 313.63 20.00 18.63 Cagamas 10.88 12.74 23.62 PDS 12.62 200.49 326.11 Corporate 38.90 14.93 193.83 Corporate Guaranteed 13.3 28.00 41.4 Financial 64.00 13.39 77.38 ABS 9.19 4.17 13.36 Source: BPAM, Source: BPAM, 4 www.marc.com.my
Secondary Market Activities Secondary Market Volume (RM billion) Asset Class Jul-14 Aug-14 MoM Chng MGS/GII 46.0 48.2 2.2 Cagamas 0.6 0.2-0.4 FI Corporate 2.4 1.7-0.7 Non FI- Corporate 6.6 7.9 1.3 Non-FI Corporate Traded by Rating Type (RM billion) Rating Type Jul-14 Aug-14 MoM Chng AAA 3.3 4. 1.2 AA 3.2 2.9-0.3 A 0.0 0.0 0.0 BBB and below 0.0 0.0 0.0 Short term 0.2 0. 0.4 Source: BPAM, Source: BPAM, MARC Rating Activities in 2014 YTD List of Rating Migration in 2014 YTD Principle Main Sector Issuer Date Announced Rating Action Rating Outlook Long-Term Rating Short-Term Rating Before After Before After Issue Size (MYR mil) Conventional Trading/Services Tesco Stores (M) Sdn Bhd 1-Jan-14 DOWNGRADED STA AAA AA+ MARC-1 MARC-1 300 Islamic Industrial Products Kinsteel Bhd 11-Mar-14 DOWNGRADED C D 100 Islamic Industrial Products Kinsteel Bhd 11-Mar-14 DEFAULT C D 100 Conventional Property Special Coral Sdn Bhd 21-Mar-14 UPGRADED STA AA AA+ 40 Conventional Property Special Coral Sdn Bhd 21-Mar-14 UPGRADED STA A AA- 3 Conventional Property Special Coral Sdn Bhd 21-Mar-14 UPGRADED STA B BB- 30 Conventional Property Special Coral Sdn Bhd 21-Mar-14 UPGRADED STA BBB A- 2 Conventional Property Special Coral Sdn Bhd 21-Mar-14 UPGRADED STA BB BBB- 10 Source: MARCWatch Placements, by Issue Count Upgrades, Downgrades and Default, by Issue Count 8 7 6 7 MARCWatch NEG MARCWatch DEV 40 3 30 2 30 32 Upgrade Downgrade Default 22 4 20 3 2 1 0 2 1 1 0 0 0 DEC-10 DEC-11 DEC-12 DEC-13 AUG-14 1 10 0 12 8 7 8 3 3 3 1 2 1 1 2010 2011 2012 2013 2014 YTD Source: Source: www.marc.com.my
List of Rating Actions in the month of July 2014 Principle Main Sector Issuer Date Announced Rating Action Rating Outlook Long-Term Rating Short-Term Rating Before After Before After Issue Size (MYR mil) Credit Enhancement Islamic Construction Talam Transform Bhd 1-Aug-14 AFFIRMED STA B- B- 134.21 Conventional Finance CIMB Bank Bhd 2-Aug-14 AFFIRMED STA AA AA 1000 Conventional Finance CIMB Bank Bhd 2-Aug-14 AFFIRMED STA AA AA 4000 Conventional Finance CIMB Bank Bhd 2-Aug-14 AFFIRMED STA AA+ AA+ 000 Conventional Finance CIMB Bank Bhd 2-Aug-14 AFFIRMED STA AA+ AA+ 10000 Islamic Finance CIMB Islamic Bank Bhd 2-Aug-14 AFFIRMED STA AA+ AA+ 2000 Islamic Finance CIMB Islamic Bank Bhd 2-Aug-14 PRELIMINARY STA AA+ AA+ 000 Islamic Technology Serrisa Sinar Bhd 26-Aug-14 WITHDRAWN AA- AA- 20 Islamic Islamic Islamic Infrastructure & Utilities Infrastructure & Utilities Trading/Services Malakoff Pow er Bhd 27-Aug-14 WITHDRAWN MARC-1 MARC-1 300 Celcom Netw orks Sdn Bhd 28-Aug-14 AFFIRMED NEG AAA AAA 000 Saraw ak Specialist Hospital & Medical Centre Sdn Bhd 28-Aug-14 AFFIRMED STA AAA AAA 42 s Source: BPAM, 6 www.marc.com.my
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