CIMB MYR and USD Weekly Fixed Income Commentary for 30 Oct 2015

Attached is the market recap for the week ended Oct 30, 2015:

Market Roundup

• Global bond players’ focus in the past couple of weeks was on central bank monetary policy, which will heavily sway short- to medium-term movements in global financial flows, currencies, and bond yields. Over a week ago, the European Central Bank (ECB) held its policy meeting, and with the still bleak prospects for the Euro Zone economy (not to mention negative inflation), ECB president Mario Draghi came out to signal his bank may be close to expand stimulus (he may mean both extension to QE asset purchases and cut in deposit rates). Bond yields in Europe fell, including those of troubled Greece. And the past few days the focus was on the US Federal Reserve. Players were eager to hear signals whether the Fed was closer to tighten policy. A hike in US rates will in turn boost returns on US Dollar assets which means further pressure on EM currencies including the Ringgit.
• Even though interest rates was maintained at last week’s Fed meeting, policymakers sounded more hawkish than before, as it removed the line that global developments may restrain growth. The FOMC also said US economic activity ‘has been expanding at moderate pace’ whilst it upgraded the rate of household spending and business fixed investment to ‘solid’ in recent months. Prospects for a Dec hike has risen, but the Fed said even though employment and inflation are near ‘mandate consistent’ levels, economic conditions may warrant interest rates to move below where it sees as ‘normal’ in the long run.
• UST yields surged (the 30T highest in over a month). But in contrast, weakness in Malaysian bonds was pared, seeing sustained demand for shorter tenor bonds. Firstly, Malaysia’s central bank is not expected to move policy anytime soon – supporting yields near present levels. Second, we think foreign players remained on the lookout for Ringgit bonds with short maturity. We partly base this on what we think as attractive Dollar asset swap levels via purchase of the shortest of Ringgit government bonds. The Ringgit momentarily above 4.3500 intraday Friday did little to squash demand for bonds. The 10-year MGS ended at 4.12% (-1bp).
• Meanwhile, Bank Negara Malaysia held auction for the 20-year GIIs. The amount on sale was small at RM1.5 billion, which had little negative impact on secondary trading. In any case, bid-cover at the auction was 2.44 times and average yield was 4.79%. We like the new 20-year GII, seen about 28bps above the 20-year MGS.