Fixed Income Quarterly Outlook - 4Q 2015

Please find our latest 4Q2015 Fixed Income outlook. The following is key points for your kind reading :-

v Markets were dazed and confused due to tighter financial conditions, sliding commodity prices, further weakness in credit and stock markets, continued guessing when the first Fed fund rate hikes will happen as global growth being adjusted downward. Topping list of worries was China’s devaluation in August that triggered the start of a risk-off trade, as it was exerting powerful disinflationary pressures on rest of the world.

v The risk-off environment has seen the Nikkei dropped below 17,000 for the first time since January. Eurozone faced tightening financial conditions and emerging market sovereign credit metrics get stressed on the back of debt sustainability that caused occasional corrections in pricing of default probabilities. Volatility continued to trade above long term average to create an environment of structurally more volatile spreads. Excessive credit risk premium was being imposed on Malaysia even higher than Thailand, which has weaker sovereign ratings. Bond yields were generally higher as players were trimming position and trading interests were mostly focused on short-tenor papers.

v Into the final quarter of the year, volatility, which is the new norm, will be with us for a long while but we are expecting some degree of market stability into later part of the year once US Fed decidedly to raise rate and market focus will be shifting from broadly bearish to relative value play. We take a contrarian view on oil prices, which have been sounding like a broken record over the past few quarters.

v The September Fed FOMC minutes suggest a tactical delay to its rate hiking cycle and we keep our position that the first hike will happen in December 2015. A 2016 rate hike may prove tougher amid presidential election and likely slower GDP growth. The peak rate in this cycle however will likely to be lower than past experiences.

v In Asia, trading direction will be guided by possibility of monetary easing against those of commodity-dependent economies. We believe China, India, Taiwan and Singapore will have the ability and room to ease and supported by domestic conditions. On the other hand, Indonesia and Malaysia, which have high commodity dependency and high foreign ownership of local currency bonds, will likely to be more vulnerable compared to its regional peers.

v Malaysia is one of few Asian countries that has high correlation with US Treasury and likely to be most impacted as we approach Fed lift off. We could see stronger upward pressure on local rates compared to what the history is suggesting if current depreciation path of Ringgit Malaysia continues and the loan-to-deposit ratio of banking system stays in excess of 85%.

v Key watch – 2016 Budget which to be tabled on 23 October. Risk of fiscal slippage will likely to cause spike in yields, elevate government debt service charges, constraint future policy options and reignite fear of sovereign ratings downgrade. We however take comfort of government’s commitment to fiscal consolidation this year and beyond.