Looking ahead into May, we believe investors may turn cautious amid the “sell in May and go away” equity market anomaly. We’ve tracked historical trend of 5- and 10-year Thai govvies from 2010 to 2016 and we found that bonds underperformed in the month of May in five out of the seven years (2010 and 2012 the exceptions). Furthermore, we also face risks due to heavy LB supply at the back of the curve and potential announcement of the Bt90 billion bond switching program. Therefore, we recommend taking profit off 5- and 10-year bonds and to re-enter when levels hit our target of 2.25% and 2.89%. This strategy sh

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

• We have to say risk from Trump’s tax plans has been muted. Focus has recently increasingly turned to the Fed. We think the UST curve will move higher and steeper heading towards the Jun FOMC, readjusting after yields plunged to the lower ranges in the past month. Going forward, there are several risk events (including French election and OPEC meeting in May and UK election in Jun) which may trigger flows for safe haven assets. However, we believe the market will continue pricing in a Jun rate hike, and we see 10T to climb and retest 2.45-2.50% range in the coming weeks. In addition, there is yet another factor which places some risk up the curve, being Treasury Secretary Steven Mnuchin’s recent comments on possible issuance of ultra-long bonds.
• As we stepped from Apr into the month of May, MYR sovereign bonds have been traded firm in conjunction with the stronger MYR. The 10-year benchmark dipped below 4.00% for the first time since Nov 2016. On the other hand, we feel further downside may be limited at 3.80% unless MYR continues to strengthen substantially. Near term, focus will be on the MPC meeting scheduled for 12 May. CIMB expects the OPR to be maintained at 3.00% till end-2017. Headline inflation climbed to +5.1% yoy in Mar 2017 (+4.5% in Feb), but higher inflation was led by cost-push factors (especially transport prices), which explains the muted reaction in the bond market. Moreover, core inflation was stable (+2.5% yoy in Mar versus same +2.5% yoy in Feb), indicating that demand pressures on prices remain at bay. CIMB Economics Research estimates headline inflation to average +3.5% in 2017, and Mar’s figure likely marks the peak for the year.
• Looking ahead into May, we believe investors may turn cautious amid the “sell in May and go away” equity market anomaly. We’ve tracked historical trend of 5- and 10-year Thai govvies from 2010 to 2016 and we found that bonds underperformed in the month of May in five out of the seven years (2010 and 2012 the exceptions). Furthermore, we also face risks due to heavy LB supply at the back of the curve and potential announcement of the Bt90 billion bond switching program. Therefore, we recommend taking profit off 5- and 10-year bonds and to re-enter when levels hit our target of 2.25% and 2.89%. This strategy should bear fruit as we expect increasing bond buying demand in the second half of 2017 due to incoming drivers such as risks in Europe (Germany election), geopolitical tensions in the Korean peninsula, and subdued price pressures. Thailand CPI expanded modestly at 0.38% yoy in Apr as fresh food and oil prices fell. BoT has reduced its 2017 CPI forecast to 1.2% (prior forecast 1.50%).
• Indonesia’s inflation is expected at 4.15% yoy in May, translated into month-on-month inflation of 0.2%. We think inflation pressure will gradually build up in the coming months (fasting month and Eid holidays). Our economist sees Indonesia inflation to increase to 4.07% yoy in Apr (but a monthly deflation of 0.02%), though the harvest season could still limit prices increases. 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. At current level, real interest rate differential between Indonesia and peers remains at a comfortable level. Aside, the variable rate tender (BI monetary operation) is expected to bring 3-month IDR Jibor averaging 6.25% in 2017, or ±100bps lower compared to end-2016. We expect Indonesian bond market to stay flat in May. Expectations of debt rating upgrade by S&P and low inflation would support domestic bond market. We have recalibrated our estimate. Now, our forecast for 10-year bond yield is to trade between 6.70-7.40% through 2017, down from 7.0 - 7.50% previously.