The post US election surge in bond yields is primarily the pricing in of fiscal-led inflation.

Summary

• The post US election surge in bond yields is primarily the pricing in of fiscal-led inflation. Yields rising and curve steepening add to expectation the Fed will hike beginning Dec 2016. We pencil in a far steeper UST yield curve in 2017 - target 2T at 1.50% and 10T 2.75-3.00%.
• Over the medium term, rates could rise more aggressively. But fiscal policy takes time to have an effect. Rate increases are probably more likely to be in 2H2017 and into 2018 rather than being imminent. There is possibly only one FOMC hike until mid-2017 and perhaps two more after that until end of year.
• Taking into consideration risks versus returns, we think there could be a small overall debt market net inflow into EM in 2017
• The MYR government yield curve should steepen from now onwards. We expect short tenor govvies to be supported but dependent on direction of Bank Negara policy. Much will depend on global market volatility, seeing risks on Ringgit and potential funds outflow. Assuming these risks and an OPR level of 2.75% end-2017, we expect 3-year MGS to close 2017 at 3.25%.
• With Fed hikes, market volatility and commodity prices, we expect longer tenor MYR govvies yields to be higher with wider spreads against the front of the curve. We expect 10-year MGS to end 2017 within 4.25-4.50%.
• Malaysia’s 2017 fiscal deficit will require financing of around RM40.3 billion. Adding on 2017 maturities of RM66.8 billion translates into a possible gross domestic government bond issuance of up to RM107.0 billion.
• Going into 2017, credit performance will be supported by economic growth potential. We think investors will watch consumption levels and corporate earnings as market drivers. However, on the trading side, sentiment will be prone to rising long tenor MGS yields. As a result, we expect credit spreads against govvies to be moderately wider in 2017.
• Based on sustained economic growth in 2017 within the government’s 4-5% GDP target, we expect primary MYR-denominated corporate bond offerings of RM90 billion.