5-year papers have upside
Decent demand. The 5-year MGS reopening auction saw decent demand with bid-cover of 1.899x for an issue size of RM4 billion.
Front-end support. We think that it was fairly priced at 3.50%, within market expectation reflected by WI of 3.50-52%, and coming alongside the recent rally in global bond markets, pushing the MGS yields to the fresh lows since last Nov. Technically, the 5-year MGS broke the support around 3.55% and could trend lower on the back of bullish EM space, as markets continue to doubt Fed's tightening in the near term period. We see short term upside at 3.45%, pending new developments from next week's FOMC meeting. In addition, there will be a lack of primary offerings in short-dated papers (<5 years) until late Nov 2017. Hence, we see the bonds along the front end of the curve to be well supported amid limited supply.
Pick up 5-year GII. On the flipside, we also like the 5-year GII, as it appears to be attractive at 3.70%, offering a 21bps spread against 5-year MGS, compared to a median spread of 14bps on year-to-date basis.
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