MY Fixed Income Outlook 2H2016: Rate Cut Hope Underpins Rally

·         MGS curve bull-flattened as risk sentiment improves and market starts building up its expectation for a cut in July's MPC meeting.

·         Supply profile is mildly positive in 3Q16 on potential reinvestment demand from large MGS maturity, but not a major catalyst as we expect some rollover demand to be met via adhoc issuance of BNM notes.

·         Overall, domestic factors are supportive of a mild strengthening of MGS. Our target yield for the 10y MGS yield is revised down to 3.65% by end-3Q16 with a view that OPR cut to materialise in 3Q16 and the deferral of FFR hike to 1H2017.