Fixed Income Quarterly Outlook - 3Q 2015

Please find our latest 3Q2015 Fixed Income outlook. The following is key points for your kind reading :-

v We saw lift-off in long-term developed market yields led by German bund. The 10-year government bonds yield for G-7 economies have risen by an average 64 basis points since the beginning of April 2015 – comparable to the taper tantrums seen in mid-2013. The reversal of global sovereign bond markets in 2Q2015 has gave up more than the gains received in 1Q2015 as fears of deflation have subsided considerably.

v The magnitude of change in Asian bond yields has been more muted as yield spread of Asian bonds against their developed market counterparts and rebound in Chinese indices served as a cushion through bond rout.

v In a surprise turn of event, Fitch Ratings reaffirmed Malaysia’s sovereign rating and upgraded outlook to ‘Stable’ from ‘Negative’. Malaysian govvies (MGS) rallied in shorter tenures as players were shortening duration, foreign shareholding of local debts stood firm and we saw active secondary trading of corporate papers for possible yields pick-up. However, Malaysia’s 5-year credit default swap (CDS), while down from peak of 151 basis points in January, remained at excessive level, reflecting cautiousness among market participants.

v Into 3Q2015, we argue for calmer market environment even though downward pressure on oil prices to be expected. Delay in Greece’s resolution means risk aversion is likely to be elevated, keeping US treasury and German bund yields lower than they otherwise would have been while Japan’ s JGB yield will likely to experience rise in liquidity premium. The upward pressure on US yield will become more visible once Greece’s concerns wane given a gradual upturn in inflation. Historically, Fed rate hikes have triggered an increase in volatility, bear flattening of US curve and US dollar supportive.

v Risk of monetary easing in Asia has receded quite substantially on the back of stability in oil prices, El-Nino related inflationary pressure and worries on reversal of capital flows. We expect front-end of Asian rates will likely to be less correlated against US rates compared mid-to-long end of the curve.  

v In the case of Malaysia, we are advocating for a curve steepening as Bank Negara Malaysia (BNM) will likely to keep its Overnight Policy Rate (OPR) steady for rest of the year. The longer-end of the curve will likely to be affected by build-up in inflation expectations, El-Nino, risk of fiscal slippage, weak foreign reserves coverage and still elevated 5-year CDS rate.

v We are still an advocate of yield investing but the attractiveness of local debts is likely to ease once US is embarking rate normalization and easing real returns given the upward pressure on local inflation.