2008 Auction Calendar

Highlights:
There are another 11 issuances of MGS and GII (5 of them are private placements) scheduled for the rest of 2008. This works out to about RM2.0b size for each of the remaining auctions.
Stripping out the private placements, the total MGS and GII (which will be issued in 2008) will amount to RM45.7b, slightly lower than the RM48.0b (which we originally expected prior to the announcement of Budget 2009).

While the larger than expected budget deficit for 2008 is expected to push yields higher, the impact will be largely negated by a number of factors. Firstly, by allocating some of the coming government bond issuances to private placements, the government is able to control the net supply of bonds to the market. Secondly, the recent 15 sen cut in petrol prices will help contain the rise in yields.

Therefore, given our view that the OPR will remain unchanged until the end of the year, we think the current sell-off in the bond market will be temporary, and expect yields to start trending downwards in 4Q08. We advise investors to start picking bonds for their portfolio in anticipation of a stronger market later in the year.

For 2009, the total gross issuance of government bonds is expected at RM65.9b. Of the 23 auctions that are scheduled in 2009, we expect 3 of them to be callables with an individual issue size of RM500m, while the remaining 20 auctions should average at RM3.0b each. Again, the large supply of government bonds will exert further pressure on the bond market in 2009. Similar to 2008, we advise investors to keep the duration of their bond portfolios short.

Over in the PDS market, the government plans to compensate toll road concessionaires a total of RM45m a year in return for a 50% cut in toll charges for buses over the next 2 years. We view this to be cash flow neutral and will not have any significant impact on the credit strength of toll operators.

Elsewhere, new PDS issuances next year should see more infrastructure/construction related bonds as the government’s 5 regional growth corridors and the 9MP kick into full swing. The RM35b allocation through 2014 to upgrade public transportation works out to about RM5b a year. As such, we can expect more Prasarana bond issuances in the next few years.