40y JGB Auction Remained Well-Received After BoJ Meeting; BoK Minutes Suggest Declining Willingness to Ease Aggressively

28 September 2016

Rates & FX Market Update

40y JGB Auction Remained Well-Received After BoJ Meeting; BoK Minutes Suggest Declining Willingness to Ease Aggressively

Highlights

¨   Global Markets: Demand for the 5y UST new issue was softer than average, garnering a BTC of 2.39x with cutoff yields at 1.129% (Aug: 2.54x; 1.125%), with the lower allocations to indirect bidders (Sep: 61.4%; Aug: 68.7%) indicating broad expectations for FOMC to raise FFR in December. UST curve bull flattened overnight as lingering expectations for a subdued inflationary pressures supported yields on 10y back to 1.56%; maintain mild overweight stance on USTs. Elsewhere, global uncertainties remained a key concern in BoJ July minutes with board members citing the possibility for weak inflation pressures to persist. The 40y JGB auction priced through current yields despite speculations for BoJ to further reduce purchases on longer tenors, with the accepted yield at 3bps below the secondary market despite having the lowest BTC this year; maintain underweight duration.

¨   AxJ Markets: BoK minutes reinforced concerns on impact of low rates on the elevated household debts, with the hawkish stance suggesting declining willingness to ease aggressively. Given the high household debt burden amid anemic growth, we opine for accommodative policies to be sustained for a prolonged period as the government implements reforms in phases, with expectations for another 12.5bps rate cut over 4Q; maintain neutral stance on KTBs. Meanwhile, the Thai Cabinet has approved a one-off cash handouts to low income farmers, along with offers of debt moratorium and reductions. With export demand likely to remain weak, the government has turned to the domestic economy for growth drivers, with multiple transport infrastructure projects in progress alongside the lofty investment budget planned for FY17. Keep a short duration tilt on ThaiGBs, with the high net supply likely to spur a steeper curve over the medium term.

¨   IDR surged overnight (+0.66%), breaking the 13,000 resistance convincingly as Indonesia achieved 55% of its non-oil and gas tax revenues due to the ongoing amnesty program, exceeding the 49% for the same period last year. Repatriation inflows are expected to improve Indonesia’s fiscal position and buttress IDR’s resilience amid external gyrations from the global markets, enhancing its attractiveness as a carry play.