CIMB MYR and USD Weekly Fixed Income Commentary for 19 Jun 2015

• Malaysian sovereign bonds strengthened during the week ended Jun 19. Improved bidding interest was sparked by the firm Ringgit against US Dollar and gains along the US Treasuries market - as the Federal Reserve held its policy interest rate and remained on the dovish side in its interest rate outlook. The USD/MYR pair headed lower to 3.7355, compared to 3.7553 a week ago.
• Malaysian sovereign bond gains were slanted towards the front end and bellies of the yield curve. Notably, the 3-year MGS was dealt 12bps lower from a week prior to 3.22%, or its lowest level since Jan 2014. The 3-year MGS at 3.22% is 3bps below the Overnight Policy Rate (OPR) (in other words, a negative spread of -3bps). We think this level is not sustainable unless there is an imminent rate cut. This spread had averaged +25bps in the past one year.
• On the flip side, corporate bonds closed marginally weaker. Net selling activities were selective, particularly along the higher rated segments, possibly due to the tight spreads and weak sentiment. However, investors showed better bidding interest towards shorter dated papers with tenors less than 5 years, possibly to keep their portfolio duration shorter.
• US Treasuries posted gains though remained volatile post the long-awaited FOMC meeting (held last week on 18 Jun). Policymakers left the Fed Funds Rate unchanged, as widely expected, while providing little clues as to when the rate will be eventually hiked. The language was not revealing, but deemed that recent economic activity had expanded ‘moderately’.  We think that Fed’s aim to manage expectation of a lower-for-longer interest rates whilst ensuring markets price in a measured tightening expectation was going according to plan. The market still thinks the Fed is on course for rate tightening soon (we think before end-2015) but has not priced in this expectation fully. The 10-year US Treasuries was hovering near 2.30% ahead of the weekend, compared with around 2.39% a week prior. Our 10T target for end-June remains 2.30%.