CIMB MYR and USD Weekly Fixed Income Commentary for 04 Sep 2015

Market Roundup

• Malaysian sovereign bonds staged a rally after the long Merdeka weekend, driven by stronger bidding interest from both local and offshore players. Gains were slanted toward the bellies of the curve, with 7- and 10-year MGS yield down 21bps and 13bps to 4.10% and 4.20% respectively. Despite sentiment slightly dampened by the Fitch’s cautious comments on Malaysia’s credit rating, citing deterioration in currency position, bonds were able to recover amid stabilizing crude oil prices and pullback in MYR during the week. Brent crude oil was slightly firmer at $50.61/bbl in contrast to $50.05/bbl a week ago, while USD/MYR reached the low of 4.1385, before eventually headed higher to near 4.2600 on Friday.
• This morning’s slump along the MYR has not brought a sell-off in MGS, with USD/MYR touched 4.3175. An fx-led sell off had already occurred in Aug after USD/MYR moved past the 3.8000 and 4.0000 levels. However, we think upside is limited, as politics, fx, and FOMC and Bank Negara’s MPC meeting remain up ahead. On the other hand, we also think a modest 0-10bps upside to yields is likely if MYR remains north of 4.3000 this week. Players are expected to avoid fresh bets in lieu of MPC and FOMC meetings. Upcoming focus will also be on the new 3.5-year MGS auction, which is expected to be announced with an issuance size of RM3.5-4.0 billion. We reckon the new short dated issue will attract decent demand.
• The Ringgit corporate bond market remained quiet last week, amid some persistent selling pressure. However, we saw hints of improved bidding interest, particularly along short and medium term papers. There were interest for papers like Woori Feb’16, OCBC Aug’22, BGSM Mgmt Dec’15 and Malakoff Power Dec’24. On the flipside, AAA and government-guaranteed names continued to see wider spreads, tracking the earlier losses posted by government bonds. Meanwhile, the primary market was muted seeing a lack of new issuances.

US Treasuries ended mixed. Long dated UST posted gains, supported after the weaker than expected non-farm payrolls and dovish comments by the ECB after its policy meeting. However, short dated UST yields are a tad higher as we close in on the FOMC meeting 18 Sep. We expect mixed performance to continue as players remain less than sure the Fed will act to hike rates next week. However, 2T at 0.71% is 46bps above the FFR (upper bound) or near its widest in five years. Thus we don’t see much upwards pressure on short UST in the coming week