Outstanding Demand for 5y UST New Issuance Ahead of Yellen’s Address at Jackson Hole Symposium

25 August 2016

Rates & FX Market Update

Outstanding Demand for 5y UST New Issuance Ahead of Yellen’s Address at Jackson Hole Symposium

Highlights

¨   Global Markets: Overwhelming demand was seen for the 5y UST new issuance yesterday, with the highest ever proportion allocated to indirect bidders (Aug: 68.7%; Jul: 53.6%), indicating investors skepticism and diminishing expectations for FFR hike trajectory over the medium term; the auction garnered a BTC of 2.54x with cutoff yields at 1.125% (Jul: 2.27x; 1.180%). Ahead of Fed’s Yellen address at Jackson Hole, we opine for a provisional hawkish stance to be insufficient to support a protracted USD rally, with DXY likely to find footing at the 94.0 support. Meanwhile, USDJPY remains encapsulated in its tight range, ending yesterday’s trading session shy of the 100.50 mark, as investors remained on the sidelines ahead of the Jackson Hole Symposium; weak near term outlook for USD alongside bouts of safe haven demand is likely to offset depreciation pressure from BoJ rate cut expectations, supporting our neutral JPY stance.

¨   AxJ Markets: Malaysian CPI eased to 1.1% y-o-y in July (June: 1.6%), weighed by sharp declines in the transport segment. MGS recorded modest gains across the curve yesterday, where higher nominal yields alongside prospect of further easing is likely to buoy the attractiveness of MGS and GII over the medium term, supporting our neutral stance on MGS, balanced by MYR’s susceptibility to external gyrations. Elsewhere, Thailand plans to borrow THB614bn in FY17, down from THB638bn planned for FY16, with THB390bn stemming from the fiscal deficit. As such, public debt is expected to rise to 45.5% of GDP (FY16: 44.2%), but remains comfortably below the 60.0% self-imposed ceiling. Mixed movements were seen on ThaiGB curve, where we expect decent demand to persist, aided by resilience on THB alongside prospect for another BoT rate cut in 4Q16.

¨   PBoC surprised the market yesterday following its decision to increase the amount of 14-day reverse repos while decreasing the amount of 7-day reverse repos, which discourages investors to utilize cheap short term funding to fuel the credit and bond market rally. USDCNY inched higher on the back of strengthening USD to 6.66, where the pair is likely to be driven by USD catalysts over the coming weeks.