STARTING today, the Employees Provident Fund looks at several issues affecting the economy and capital markets. Its series of articles every fortnight will also examine some of the interesting corporate events and companies themselves.
IN a surprise move aimed at keeping inflation in check, Bank Negara raised the overnight policy rate (OPR) by 25 basis points (bps) to 3.5%. In its statement issued after the Monetary Policy Committee (MPC) meeting on April 25, the central bank expressed confidence that economic growth will remain strong, supported by favourable export growth and resilient consumer spending.
The move was seen as more of a preventive measure to temper inflation from choking consumer spending and economic growth.
The latest Statistics Department data showed that inflation had accelerated to 4.8% in March from 3.2% the first two months in 2006. This is not surprising, as the market has expected the impact from the recent increase in the retail prices for petrol and diesel to flow through in March and in the coming months.
Transport costs, accounting for 15.9% of the consumer price index (CPI) basket, rose to 18.1% in March from 8.1% in February. However, the knock-on effect on prices of consumer goods was not significant. Prices of food and beverages during the month decelerated to 3.5% from 4.1% in February, while alcoholic, beverages and tobacco were down to 7% from 7.2% .
The central bank said it expected higher inflation in the first half of the year, with a more moderate price increases in the second half. On the back of the one-off reduction of fuel subsidy for the year, the market is expecting the inflation rate to stay above 4% in April–July, before reducing to around 3.1%-3.5% in the second half.
Meanwhile, secondary trading in the ringgit bond market started the month in an active mode. Buying interest was observed, especially below 5-year maturity after experiencing heavy selling in April, influenced by the speculation over the prospects of Bank Negara raising the OPR.
Sovereign yields have been elevating by 35-40 bps in April and 27-41 bps since the central bank last hiked its interest rate by 25 bps to 3.25% on Feb 17. For the first three days of trading (May 2-4), sovereign benchmark yields continued to move within a tight range after moving up 3 bps for the three- and 10-year benchmark, while the five-year benchmark slipped 8 bps during the week of the MPC releases.
Average daily trading for the ringgit bond market for the three days stood at RM2bil against RM2.2bil in the previous week.
The average daily trading for sovereign papers was RM952mil for the first three days of trading compared with RM1.1bil the week before, with focus mainly on less than five years' maturity. Average daily trading for three- to five- year papers rose to RM425mil from RM252mil. Trading on the 2.9-year benchmark MV03/09 was lethargic, with total volume at only RM83mil compared with RM165mil earlier. However, despite the rise in interest rate last week, yields turned around to move 6 bps lower to 3.92% after rising 3 bps to close at 3.98% the previous Friday.
In contrast, the three-year GG04/09 was heavily traded but yields inched up marginally by only 1 bps to 4.02%. The 5.1-year MGS benchmark was the most actively traded during the week albeit yields remained unchanged at 4.18%. Similarly, yields for the 10.4-year benchmark MO09/16 remained at 4.51% after hitting a low of 4.49% on May 3.
Market players were net buyers, especially for one-year papers to maturity. MG12/07 and MW12/07 both shed 7 bps to 3.71% and 3.78% respectively on Thursday, after touching 3.65% and 3.64% the day before. Both short (3/5s) and long-term yield spread (3/10s) widened to 26 and 59 bps compared with 15 and 49 bps respectively on Feb 17.
Interest was also observed in the quasi papers. The 3-year Caga1/04 Jan’07 was seen trading 42 bps higher at 3.71% while the near-to-maturity 0.6-year Caga20/03 Aug’06 bounced back to 2.96% on Thursday after closing 2.77% the day before.
Khaz 1/03 Jun’08 was dealt 26 bps higher at 3.95% than when it was last traded a month ago. On a slightly longer tenure, the 3.3-year Khaz 1/04 Sep’09 looks attractive at 4.31% against the 3.3-year GII and 2.9-year MGS benchmark, which was trading 29 and 39 bps lower at 4.02% and 3.92% respectively.
In the private debt securities (PDS) market, average daily trading volume rose to RM248mil for May 2-4 from RM223mil in the previous week, with liquidity flows concentrated mainly on short-dated tenure of lower grades. Yields were seen higher across all tenures.
Activities in the AAA segment were lukewarm. Putrajaya Aug’06 remained unchanged at 3.53% with thin trading volume, while Plus May’11 dipped 0.3% to close at 4.85% on 3 May. Market was net seller on Cagamas MBS Oct’07 and Dec’08, with yields moving higher by 25 and 30 bps respectively to 4.10% and 4.25%. Both papers were last traded at 3.85% and 3.95% on March 28.
Going down one notch, interest was on the infrastructure and utilities papers. Yields on AA1-rated Tenaga Oct’07 was traded lower by 4 bps to 4.05%, while near-to-maturity YTL Power MTN Aug’06 jumped 34 bps higher to 3.94%. The paper was last traded at 3.6% in early April.
Yields on YTL Power Jul’12 were trading at 5.03% lower than the slightly shorter-tenure KEV Jan’12, which was dealt at 5.05%. The AA2-rated Penang Bridge Mar’07 was 45 bps higher at 4.50%, after being absence from the market for almost two months. Moving up the term structure, Penang Bridge Aug’12 was 26 bps higher at 5.10% from 4.84% earlier. Mixed performance on the water bonds, with Puncak Niaga Oct’13 traded 80 bps higher at 5%. The paper was last traded on Nov 2005 at the yields of 4.2%. Splash Jul’09 declined 5 bps to 4.70%
Activity in A segment was higher, especially for papers of one to two years tenure, with market players being selective for yield pick-up.
Heavy trading was observed on the new Titisan Modal Apr’19, which was dealt at 8.05% on Wednesday. The 15-year RM110mil bonds were issued on 28 April and carried a coupon of 4%. Meanwhile, Ingress Jul’10 rose significantly by 98 bps to 5.64% while Ingress Jul’11 slipped 6 bps to 6.10%. The paper was last traded at 6.16% in January.
(The cut-off date for all the data in bond market commentary is May 4).
l Siti Khairon Shariff is general manager of the economics & capital market division of the Employees Provident Fund (EPF).