CIMB MYR and USD Weekly Fixed Income Commentary for 29 May 2015

Market Roundup

• Ringgit government bonds were dealt weaker on a week-on-week basis, amid lacklustre trading interest, possibly due to the absence of macroeconomic data releases and other fresh drivers. Overall, players were better buyers across the front end of the yield curve. Players were also looking for yield pickup as they bought selected off-the-run (non-benchmark) papers. The 5-year MGS ended at 3.58% (+2bps) and the 10-year MGS at 3.91% (+4bps).
• For the coming week, market focus will be on the release of April trade balance number, slated for 5 June. In addition, we may also hear details of the upcoming reopening auction for the 10-year MGS (MGS Sep’25). The next MGS auction may see an issue size of RM3 billion. So far this year, the government has issued MGS and GII totaling RM40.0 billion. This is pretty much on track as we think total government bond issuance will come up to RM92.0 billion in 2015 (both for fiscal deficit financing and refinancing of maturing papers during the year).  We think MGS yields will sustain at higher levels with the curve maintaining its relatively steep stance. Sentiment looks positive for continued low rates along the front end of the curve, seeing the recent fall in KLIBOR rates as liquidity remains ample amid a lack of fresh bills auctions.  Resistance for the 10-year MGS remains 3.98%.
• Last week, US Treasuries strengthened amid the release of mixed to weak economic data and ongoing Greece debt talks. Bleak economic data was led by Friday’s release of contraction in 1Q2015 GDP – which was revised down to contraction of 0.7%% in contrast to the 0.2% growth in an earlier estimate. On the other hand, the contraction of 0.7% was smaller than earlier consensus of -0.9% estimated by economists. More weak data released late last week included the Chicago PMI which fell to a reading of 46.2 in May from 52.3 in April.
• This week, more data releases will dictate UST movement though we think the weak 1Q2015 GDP will still play a prominent driver on sentiment. Upcoming data include PCE deflator, factory orders, ISM manufacturing and services and weekly jobless claims and Challenger jobs, which goes straight to the May non-farm payrolls (consensus 225k versus 223k in April). We also have Chicago Fed President Evans speaking at a Chicago Banking Symposium Wednesday. We see mild reversal in UST yields this week unless macro data disappoints too much. Medium-term range remains narrow. Our short term 10T target is 2.32%, with exit at 2.00%.
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