Malaysian Power, Toll-Road Bonds Favored by CIMB on Cash Flows

Malaysia’s CIMB-Principal Asset Management Bhd. is favoring debt of the nation’s power producers and toll-road companies because of the steady cash flows, its chief investment officer said in an interview.

The investment vehicle is opting for three- to seven-year bonds as it’s penciling in a 25 basis point increase in the central bank’s benchmark interest rate in the second half, CIO Arnold Lim said yesterday. The asset management arm of CIMB Group Holdings Bhd., Malaysia’s second-biggest banking group, may sell holdings of sovereign notes if the yield premium over U.S. Treasuries narrows, he said.

Malaysia’s local-currency government bonds returned 1.1 percent over the past year, the second-best performance in Southeast Asia after Thailand, according to indexes compiled by HSBC Holdings Plc. Policy makers may raise borrowing costs in 2014 for the first time since 2011 after inflation accelerated to a two-year high, a Bloomberg survey of economists shows.

“In terms of credit, we prefer the strong independent power producers with a steady cash-flow stream,” Kuala Lumpur-based Lim said, without recommending specific bonds. The preference “is on the shorter end to insulate against potential rate hikes,” he said.

The central bank could still opt to hold off from tightening policy to avoid burdening consumers after the increases to power and fuel tariffs, Lim said.

CIMB-Principal manages about $15 billion and oversees the CIMB-Principal Bond Fund, which delivered returns to investors of 2.5 percent in the last year, data compiled by Bloomberg show. About 75 percent of the fund’s 412 million ringgit ($126 million) of assets are invested in debt with maturities of more than three years, 21 percent in notes of three years or less, and 4.2 percent in cash, according to its fact sheet dated Jan. 31.

‘Trading Stance’

Malaysian government bonds are vulnerable to a selloff should the yield premium over U.S. Treasuries narrow given the scale of holdings by global investors, Lim said. Overseas funds held 29 percent of those securities, excluding bills, in January, compared with a 17 portion in Thailand, according to the latest available data from the respective central banks.

The yield on Malaysia’s 10-year ringgit-denominated sovereign notes has held between 4.09 percent and 4.12 percent since Feb. 17, data compiled by Bloomberg show. It reached 4.3 percent on Jan. 27, the highest level January 2010.

The difference in yields with similar-maturity U.S. debt narrowed nine basis points this month to 137, down from 166 on Feb. 3 that was the widest since May 2013.

“When the pickup between the 10 year here and the 10 year in the U.S. narrows, there’s always the risk of a sell down,” Lim said. “For that reason, we’re taking a trading stance on Malaysian government securities. At the first sign of trouble, we’re ready to sell.”

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