Fixed Income - Outlook For August

Transcription

1. August 9 , 2016 Global Markets Research Fixed Income August 2016 Monthly Perspective Chang Wai Ming MYR Bond Market Fixed Income Strategist Hong Leong Bank Berhad, Global Markets Fixed Income & Economic Research Recapping the month of July WMChang@hlbb.hongleong.com.my (603) 2773 0532 In July, focus seen on key monetary policy meetings held, with investors increasingly pricing in prospects of further monetary easing measures. On the local front, BNM surprised markets with a 25 bps OPR cut bringing the level to 3.00%. BOE recently cut its key policy rate by 25 bps to 0.25% and expanded its bond buying programme. In the US, the Fed left the fed fund rate unchanged, reiterating that path to interest rate normalization to remain gradual. The Fed’s rhetoric sounded a tad more optimistic, citing that “near-term risks to economic outlook have diminished” and that economic conditions will evolve in a manner that will warrant only gradual increases in the fed fund rate. Meanwhile latest July non-farm payroll release surprised on the upside with 255K gain versus consensus’ 180K. In Australia, RBA joint the “rate cut” camp, slashing its interest rate by another 25 bps to 1.50% to prevent risk of disinflation and to ensure a healthy Aussie labour market. Given the benign global growth outlook reinforced by recent downward revision by IMF and street estimates, we opine demand for duration to persist for fixed income investments. As investors continue to hunt for yields, regional Emerging Asian local currency sovereign curves are expected to mirror a flattening bias trend as the long-end offers better relative yield pickup. In its latest July release, IMF revised global growth projections lower for 2016 and 2017 by 0.1% respectively to 3.1% and 3.4%. Impact to growth is expected to unfold following Brexit, affecting advanced European economies more but may appear rather modest elsewhere for countries like US and China. Going forward, investors will have to adjust to a global environment where interest rates will remain benign for an extended period which is seen as the new norm. Combined with prospects of concerted monetary easing measures, Emerging Asian local currency bond markets will continue to remain supported for now given the appeal of higher relative yields versus bonds from advanced/developed economies. All eyes on this week’s 2Q GDP release for Malaysia. MYR sovereign curve (MGS) Source : Bloomberg 1
2. FIXED INCOME August 9 , 2016 BOE expands bond buying programme and reduced key policy rate to 0.25%, as pre-emptive measure to moderate Brexit impact BOE slashed its key policy rate by 25 bps to 0.25% whilst expanding the purchase target for government bonds to GBP435b from GBP375b.The extra GBP60b will be bought over the coming 6 months. Such measures are part of pre-emptive measures introduced by BOE in moderating the downside risks to growth for the UK economy following its decision to leave the EU region. MYR govvies staged strong rally following 25 bps OPR cut by BNM Following the surprise OPR cut by BNM, MGS/GII yields have compressed lower, with bond yields shaved 10-25 bps across benchmarks. Given the benign global rates environment and dimmer Fed hike views we opine foreign ownership levels are expected to remain relatively sticky for now. Recent bargain hunting interest on the belly of the curve, skewed towards 5-year and 7-year MGS/GII reinforces our view. For instance GII 8/21 and GII 7/23 have been garnering strong traction, with increased interest from both onshore and offshore investors. On a related note, lifers and pension funds with a natural need for duration, are expected to extend out the curve. MGS 7/16 and GII 7/16 matured, offshore investors seen rotating into the short and belly of the curve Taking cue from recent movement in MGS/GII yields which appears to be supported, we opine the maturity from MGS 7/16 and GII 7/16 (in combined amounts of RM14.39b) had a neutral impact to the MYR bonds space. As the higher relative yields of MYR government bonds still looks constructive, offshore investors seen rolling over investments into short and belly of the curve. Increased activities in the short-ends (1- to 3-year) as well as belly (5-, 7- and 10-year) suggest investment roll-over trends from offshore players. On this note, benchmark GII 8/21 and GII 7/23 have been garnering strong traded volume. Foreign holdings of MYR bonds climbed higher in July, another new record level for MGS circa 51.9% For the month of July, foreign holdings of MYR bonds climbed higher as offshore investors continue to hunt for yields amid benign global rates environment. Scheduled bond maturities circa RM14.39b from MGS7/16 and GII 7/16 for the month of July had neutral impact to the MYR bond scene, due to investment rollovers. Foreign holdings of MGS gained RM3.2b to reach RM185.3b (circa 51.9% of MGS outstanding) which was a new record high in terms of foreign ownership levels. On a related note foreign holdings of GII gained RM2.5b to reach RM24.3b circa 10.6% of GII outstanding. Overall foreign ownership of MYR bonds saw net increase of RM5.7b to reach RM240.8b, 20.7% of outstanding MYR bonds. We expect foreign holdings of MYR govvies to remain relatively sticky as concerted monetary easing by global central banks are expected to amplify the appeal of higher yielding Emerging Asian local currency sovereign bonds. Please refer to chart attached for further details on foreign ownership levels by security type. 2
3. FIXED INCOME August 9 , 2016 Summary of foreign holdings of MYR bonds by type Source : BNM, Bloomberg, HLB Global Markets Research MGS 8/23 prints modest BTC at 1.577x. 25-26 bps spread vs 5-year MGS 11/21 may lure tactical interest… Latest MGS 8/23 printed a softer BTC of 1.577x with players opting to stay on the sideline pre-BOE MPC. Although EM Asian sovereign bond yields have grinded lower post-Brexit, we opine the higher relative yields versus government bonds from advanced economies still appeals to investors. Recall, previous auction of MGS 8/23 printed a BTC of 2.04x back in April at average yield of 3.80%, reinforcing views of yield compression. Up next is the 15-year GII reopening (GII 9/30) which we are penciling in a tender size of RM2.5b. 3
4. FIXED INCOME August 9 , 2016 Source : Bloomberg, BNM, HLB Global Markets Research Thinner MGS govvies traded volume for July, but levels supported post OPR cut Traded volume for MGS/GII was thinner for the month of July as players opted to stay sideline ahead of key policy meeting events. However post BNM OPR cut, traded volume garnered traction with increased amount changing hands. In July, total traded volume for MGS and GII circa RM44.7b and RM36b respectively, representing 55% and 45% of traded govvies. (Combined amounts was lower RM80b in July versus RM106b in June). Interestingly we saw pickup in MGS and GII 5-year and 7-year papers suggesting increased interest for this space. Going forward, we expect demand to extend out to the longer-dated space as the search for yields continue. Source : BPAM, Bloomberg 4
5. FIXED INCOME August 9 , 2016 Likewise thinner traded volume for corporate bonds/sukuk Source : BPAM, Bloomberg In July, tracking the similar trend seen in MYR govvies space, traded volume for corporate bonds/sukuk also trended lower amounting to RM10.4b versus RM14.7b transacted for the month of June. Trading volume was mostly skewed towards the quasi and AAA space, with 36% and 26% respectively, whilst the remaining balance of 33% and 5% came from AA and A space. Actively traded stocks during the period in review comprised of short-dated Cagamas ‘10/16 with RM295m, whilst Danga ‘2/26 saw RM260m changing hands. Recently downgraded Tan Chong Motors ‘11/19 saw a combined RM245m crossed. Please refer to chart on actively traded corporate bonds/sukuk (ranked by volume traded) for the month of July. Actively traded corporate bonds/sukuk for the month of July Source : BPAM, Bloomberg 5
6. FIXED INCOME August 9 , 2016 UST Market USD sovereign curve (Source : Bloomberg) Post Brexit, UST seen trading on range-bound mode as higher relative yields versus sovereign bonds of advanced economies seen supporting demand. With spreads for 10-year UST over 150 bps versus German Bunds and circa 90 bps over UK Gilts, the higher relative yields of UST continues to attract interest. However, yields seen creeping higher last Friday following the upbeat July NFP with job gains of 255K versus consensus’ 180K. UST yields are expected to rangebound, to be somewhat data dependent. Pace to US interest rate normalization are expected to remain on gradual path as hinted by recent Fed rhetoric. Asian Dollar Bonds During the period in review, a slew of Asian issuers seen tapping the USD credit space include $250m print from HK Airlines which received demand exceeding $1b. HK Airline issued $250m maturing 2019 at 5.65% versus initial price guidance of 6%. Investors for this print comprised of asset managers (52%), private banks (36%), banks (9%) and corporates (3%). CSI Properties also priced its $250m 5year paper at 4.875% versus initial price guidance of 5.125%. Also India Exim received orders of up to $2.5b for its $1b 10-year bond priced at CT+187bps versus price guidance of CT+210 bps. Investor type for this issue comprised of asset manager (76%), insurers (11%), sovereign wealth/central banks (5%) as well as private banks and banks (8%). Source : Bloomberg 6
7. FIXED INCOME August 9 , 2016 Outlook for August Malaysia’s 2Q GDP in Focus We opine market players will be focusing on this week’s 2Q GDP release. We expect BNM to maintain the OPR level accommodative for now with focus on growth remains a key watch. Bloomberg consensus expects a 4.0% print for 2Q following 4.2% gain seen in 1Q. The rhetoric of the central bank on growth assessment and inflation prospects will be closely followed by investors. Reopening of 15-year GII 9/30 and 10-year MGS 11/26 in focus With the completion of the 7-year MGS 8/23 reopening which saw a rather modest BTC cover of 1.577x, focus will now shift towards upcoming 15-year GII reopening and 10-year MGS reopening. We are penciling in a tender size of circa RM2.5b and RM3.5b for these upcoming prints. Should BTC reverses back to a healthier trend, we expect renewed traction for MYR bonds to emerge. Duration demand seen as key theme Amid a benign global rates environment emerging as a new norm, we expect investors to extend out the curve in search of higher relative yields. Duration demand are expected to translate to curve flattening trends for the MYR bond space and we expect long-end yields to tighten further. 7
8. FIXED INCOME August 9 , 2016 Hong Leong Bank Berhad Fixed Income & Economic Research, Global Markets Level 6, Wisma Hong Leong 18, Jalan Perak 50450 Kuala Lumpur Tel: 603-2773 0469 Fax: 603-2164 9305 Email: HLMarkets@hlbb.hongleong.com.my DISCLAIMER This report is for information purposes only and does not take into account the investment objectives, financial situation or particular needs of any particular recipient. The information contained herein does not constitute the provision of investment advice and is not intended as an offer or solicitation with respect to the purchase or sale of any of the financial instruments mentioned in this report and will not form the basis or a part of any contract or commitment whatsoever. The information contained in this publication is derived from data obtained from sources believed by Hong Leong Bank Berhad (“HLBB”) to be reliable and in good faith, but no warranties or guarantees, representations are made by HLBB with regard to the accuracy, completeness or suitability of the data. Any opinions expressed reflect the current judgment of the authors of the report and do not necessarily represent the opinion of HLBB or any of the companies within the Hong Leong Bank Group (“HLB Group”). The opinions reflected herein may change without notice and the opinions do not necessarily correspond to the opinions of HLBB. HLBB does not have an obligation to amend, modify or update this report or to otherwise notify a reader or recipient thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. HLB Group, their directors, employees and representatives do not have any responsibility or liability to any person or recipient (whether by reason of negligence, negligent misstatement or otherwise) arising from any statement, opinion or information, expressed or implied, arising out of, contained in or derived from or omission from the reports or matter. HLBB may, to the extent permitted by law, buy, sell or hold significantly long or short positions; act as investment and/or commercial bankers; be represented on the board of the issuers; and/or engage in ‘market making’ of securities mentioned herein. The past performance of financial instruments is not indicative of future results. Whilst every effort is made to ensure that statements of facts made in this report are accurate, all estimates, projections, forecasts, expressions of opinion and other subjective judgments contained in this report are based on assumptions considered to be reasonable as of the date of the document in which they are contained and must not be construed as a representation that the matters referred to therein will occur. Any projections or forecasts mentioned in this report may not be achieved due to multiple risk factors including without limitation market volatility, sector volatility, corporate actions, the unavailability of complete and accurate information. No assurance can be given that any opinion described herein would yield favorable investment results. Recipients who are not market professional or institutional investor customer of HLBB should seek the advice of their independent financial advisor prior to taking any investment decision based on the recommendations in this report. HLBB may provide hyperlinks to websites of entities mentioned in this report, however the inclusion of a link does not imply that HLBB endorses, recommends or approves any material on the linked page or accessible from it. Such linked websites are accessed entirely at your own risk. HLBB does not accept responsibility whatsoever for any such material, nor for consequences of its use. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for the use of the addressees only and may not be redistributed, reproduced or passed on to any other person or published, in part or in whole, for any purpose, without the prior, written consent of HLBB. The manner of distributing this report may be restricted by law or regulation in certain countries. Persons into whose possession this report may come are required to inform themselves about and to observe such restrictions. By accepting this report, a recipient hereof agrees to be bound by the foregoing limitations. 8