Active bond market seen: Aseambankers


By P.W. Thong

THE Malaysian bond market is gradually entering a buoyant cycle and institutional investors should look to the domestic bond market for capital gains opportunities, particularly bonds with credit ratings lower than the AAA issues such as AA or single-A corporate bonds. 

According to Aseambankers Malaysia Bhd assistant vice-president and economist, Baljeet Kaur Grewal, the private debt securities (PDS) market had been fairly buoyant in the first quarter of this year, especially in the AAA band, denoting the market preference for higher rated papers, given the defensive stance of most investors. 

Baljeet Kaur Grewal

“We expect the current bull in the bond market to stay around longer, at least until the fourth quarter of this year, against its usual bullish cycle of about one-quarter, due to the uncertainties in geo-political and the adverse impact from the Severe Acute Respiratory Syndrome (SARS) outbreak,'' Baljeet told StarBiz yesterday. 

In her maiden quarterly bond market report titled “Bond beat: Keeping the faith,'' Baljeet said the domestic bond market was at present an “issuer's market”, given the appetite for fixed investments and good quality credit.  

“On this premise, (we) expect the second and third quarters to be characterised by increased issuances, namely in the power and gas industry, infrastructure and potentially, telcos/plantations arising from proposed merger and acquisition activities,'' she said. 

In addition, she said the government's need to finance its pump priming measures, as well as to refinance its existing maturing debts, would also fuel interest in the local bond market. 

“On average, we envisage a 17% increase in domestic fund raising activities in the year (an estimated RM24bil worth of new PDS), as low interest rate levels signify an opportune time for corporations to lock in rates for long-term financing,'' Baljeet said. 

“The resilience and activity in the market implies that bonds are coming back onto the radar screens of investors - thus, indifference or apathy is no longer an option. The confluence of geopolitical events and economic woes surrounding global markets depict the shift in asset allocation from riskier assets and investment holdings to quality, safe haven securities,'' she said. 

But trading in corporate bonds had so far been centred on higher-rated AAA issues as investors scuttled to the safer harbours of quality papers given the prevalent economic risks. As a result of the increased appetite for quality bonds, yields on AAA bonds have increasingly come under pressure. 

For example, in the first quarter this year, turnover in the PDS market averaged at RM10.4bil, but a good deal of the trading activity was centred on AAA bonds such as Projek Lebuhraya Utara-Selatan Bhd and Petronas Gas Bhd

“As yields on quality rated issues begin to narrow, the incremental benefit of staying further up the credit curve becomes less appealing. Thus, we invoke moving into noted AA names, namely in the power sector given the industry potential and sector growth. 

“Yields on most AA names have also seen significant tightening given the preference for higher returns. Names that we favour include YTL Corp Bhd, Teknologi Tenaga Perlis Corp and Prai Power. In the single-A segment, the bolder investor may want to consider RHB and Alliance Bank sub-debts, Celcom (M) Bhd and SILK (Sistem Lingkaran Lebuhraya Kajang Sdn Bhd) bonds, which offer attractive yields at cheaper levels. 

“AA papers remain attractive at current levels with potential yielding strength in the near term,'' Baljeet said in her report. 

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