US Treasury yields tumbled after the Fed raised interest rate by 0.25% as widely expected but did not signal accelerating the tightening pace. At this moment, UST appear to be in consolidation phase at the lower ranges, with 10T trading near the Feb low of 2.31%. We expect the range trading to be intact in the short term period, unless major risk-off events spur demand for safe haven assets or on the flipside more announcement fro

Attached is the monthly market commentary for Mar 2017. We have included the near term outlook for the month of Apr 2017.

• US Treasury yields tumbled after the Fed raised interest rate by 0.25% as widely expected but did not signal accelerating the tightening pace. At this moment, UST appear to be in consolidation phase at the lower ranges, with 10T trading near the Feb low of 2.31%. We expect the range trading to be intact in the short term period, unless major risk-off events spur demand for safe haven assets or on the flipside more announcement from Trump’s fiscal policy. Highlight will be the Mar FOMC meeting minutes and the Mar non-farm payrolls release (consensus +175k). However, we do not expect large market reactions to data unless releases deviate largely from market expectations.
• Ringgit bonds weakened late Mar following the releases of Feb CPI data, as well as Bank Negara 2016 annual report (with higher headline CPI expectation in 2017). Despite higher inflationary pressure, CIMB’s house view remains the OPR at 3.00% till end-2017. Plus, we believe Bank Negara will tolerate inflation at levels below 4%, as drivers are mainly cost-induced.
• Amid inflation concerns and the curve relatively flat, the 10-year MGS could see further pressure. Nevertheless, that’s not the only driver. The other would be that the current 10-year MGS (MGS Nov’26) is due to turn off-the-run when we welcome offering of new MGS Nov’27 in May. If we take into account Bank Negara Malaysia not tightening anytime soon, then MGS Nov’26 could prove attractive for trading purposes. However, we aren’t’ going long 10-year MGS pending the auction. Instead, we focus on MGS with maturity 5-10 years for trading gains.
• Both of external and internal environments lend support to Thai bonds amid funds rotation to EM bonds in which the country that has solid external balance, contained price risk, and moderate economic growth. Therefore, we expect new supply of LB226A, LB366A, and LB466A totaling Bt50 billion will be entirely absorbed at above 1 bid-to-coverage ratio. In addition, tumbling bond yields leads the decline in the swap rate (5-year THBIRS rate traded lower to about 2.19% on 4 Apr). We expect limited downside below 2.17% according to market interest of paying fixed on dips.
• Expectation of rate hikes by the Fed could weaken Rupiah temporarily, though Rupiah could strengthen after each Fed hike. Bank CIMB Niaga forecasts USD/IDR to average at 13575 in Q2 2017. Correspondingly, we expect Indonesia bond market to slightly strengthen in Apr. Expectations of debt rating upgrade by S&P and low inflation would support domestic bond market. Our forecast for 10-year bond yield is to trade around 7.0-7.50% end 2017.
• Our Indonesia economist sees Indonesia inflation is to increase to 4.07% yoy in Apr, but a monthly deflation of 0.02%. We think harvest season could keep inflation low in April. Meanwhile, the BI 7-day repo rate is expected to stay at 4.75% in 2017 due to rising interest rates in the US, the effort to maintain interest rate differentials between Indonesia versus peers, and the prospect of higher inflation due to rebalancing in electricity tariff. Variable rate tender for BI monetary operation is expected to bring 3-month IDR Jibor averaging 6.25% in 2017, ±100bps lower compared to end-2016. However higher BI term structures could lead to a different result.