Monday, March 7, 2016

CIMB Fixed Income Commentary for the Month ended Feb 2016

US Treasuries & Asian Dollar-denominated Bonds


US Treasuries continued to perform well, support by risk-off sentiment driven from the stock market jitters and volatile crude oil prices. On top of that, the buying interest was underpinned by weaker-than-expected economic release, as expectation of a quick Fed hike dimmed.

Our economist views that the Fed will not hike rate this year, due to the soft growth and inflationary pressure. Assuming the Fed keeps rates unchanged, we are expecting the yield curve to remain flat for a prolonged period this year. In the near term, key events to watch out for will be central bank meetings of the ECB (10 Mar), BoJ (15 Mar) and Fed (16 Mar). While yields may stay low ahead of ECB and BoJ meetings (due to expectations further easing), we do not rule out a knee-jerk rise in yields if the central banks dish out less-dovish-than-expected statement or easing measures. Elsewhere, market also perceives that the Fed will not hike in the upcoming meeting, with a high implied probability of 92.0%.

Elsewhere, US Treasuries and global markets may see further volatility if crude oil prices continue to swing, as OPEC will meet non-OPEC members by 20 Mar for output freeze discussion. We think that chances of a prolonged supply glut remain intact, but optimism over the meeting outcome can be a wild card in the near term.
Malaysian Bond Market


We think Ringgit govvies will remain well supported in the near term period, as yields appear to be decently attractive particularly after the continued easing from major central banks (BoJ and ECB), while the market generally expects the Fed to keep its normalization progress at a very minimal pace. Sentiment has also been lifted on the back of a recovery in MYR, which has spurred foreign interest and driven sovereign yields lower on the front and bellies of the curve since early this year.

Our economist thinks the Fed will not tighten at all this year, and USD may not be as strong as previously expected. This implies some room for policy maneuvering in many Asian countries, including Malaysia. With Ringgit stabilizing, CIMB now expects Bank Negara would now be able to cut the OPR by 50bps to 2.75% in 2H2016. CIMB Economics Research thinks weak spending prospects will remain in play for some time this year until there are firmer signs of domestic demand recovery. The rebound in fixed investments, led by infrastructure projects spending, will spur domestic demand, which would underpin the cyclical rebound in the second half of this year. Our economist sees GDP growth of 4.6% in 2016. Meantime, CPI is expected to peak in Feb but subsequently moderate in the lower range of 2.7-3.3% after Mar. CIMB maintains its CPI forecast for 2016 at 3.5%.

With room for monetary easing in Malaysia, stable Fed, and taking the assumption that OPR would end the year 2.75% as well as target for consumer inflation at average of 3.50% in 2016, we have revised our end-2016 target for 3-year MGS down to 3.00% (from 3.50% prior estimate), the 10-year MGS to 4.00% (from 4.40% prior estimate). Meantime, the 15-year MGS should hover near 4.25% end-2016. We expect a slight steepening of the MGS curve by end-2016 to take into account increased inflationary pressure and increased govvies supply in the short to medium term horizon.
Thai Bond Market


Thai government bond yields trended lower in Feb, benefitting from foreign inflows as well as thin supplies from the primary market. However, we think that yields may be contained in the low levels in the short term horizon, as players anticipate subdued economic growth may prompt the central bank to ease further. Externally, the low yielding environment in major economies may cause further inflows into the Thai bond market, if the THB is able to stabilize or even strengthen.

BoT maintained their accommodative stance in the previous MPC meeting held in Jan, but kept the policy rate unchanged at 1.50%. We see possible downside in rates (although it may not be in the near term), as the economic outlook continues to be weak. On the flipside, CIMB Economics Research thinks that the central bank may slash the rate down to 1.00% by end-2016.
Indonesian Bond Market


Inflation increased to 4.42% yoy in Feb from 4.14% in Jan, while core inflation was 3.59%, the lowest since Mar 2010. On a month-on-month basis, prices showed contraction of 0.09% due to lower food, housing/utilities and transportation costs. Inflation is expected to be around 4.4% in 2016. Hence, due to low inflation, we think that high yield domestic bonds provide significant real interest rate returns.

Bank Indonesia cut interest rate for the second time in a row (by 25bps to 7.00%) while slashing banks’ reserve requirements by 100bps to 6.5%. BI said that there are more room for further rate cuts. In Mar 2016, we expect the bond market to strengthen further, due to anticipation of a BI rate cut (but stable Rupiah). We see BI rate to fall to 6.25% by the end of 2016. However, downside for bonds are persistent high volatility in the global markets and chances of a higher government budget deficit this year than targeted.


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