US Treasuries closed mixed with a flattening bias. The market was generally quiet ahead of inflation data due Wednesday. Market was also cautious after earlier announcement of the new budget deal - worth $4.4t with deficit of expectation of $7.095t over next 10 years against Trump's prior target of $3.150t – as well as Monday's and Tuesday's auction of T-bills amounting to $190b. The new budget is expected to increase next two years' spending by almost $300b. Even before the new budget, the Treasury Department had already indicated it would increase borrowings in the coming year (after tax overhaul agreement back in December where estimates run to over $1.0t in expected new debt supply). Aside, consensus for January CPI ex-food and energy is +0.2% mom (+0.2% mom in December 2017), and core PPI ex-food and energy at 0.2% mom versus 0.1% in December. As we err on faster inflation, we expect sustained or mildly higher yield levels for medium to longer tenor UST. However, we expect profit-taking pressure on shorter dated UST to mildly flatten the curve.
Malaysian government bonds received net buying interest on Tuesday, but mostly along off-the-runs amid a lack of fresh drivers and one day before the 4Q2017 GDP release. Sentiment was supported by USD/MYR holding below the 3.9500 level. As it were, consensus amongst economists is a slower 5.8% growth (3Q2017 was +6.2% yoy). Missing this consensus should provide some support for the safer MYR government bonds. We also have the January 2018 CPI data due in over a week's time. We note the December 2017 core CPI was stable at just +2.2% yoy.
The Baht held steady on demand for the Thai currency one day ahead of BoT's policy meeting. Government bonds gained as a result with demand seen along the middle and long end of the yield curve. USD/THB was around 31.497 late Tuesday versus 31.698 overnight.
IndoGBs opened fairly unchanged in the morning but auction became the game changer. Yesterday's auction generated bids of IDR45.85t. However, MoF decided to upsize the issuance from target IDR17t to IDR21t. Supply became enough and secondary market post-auction weakened. IndoGB closed with yields up 2-5bps.
Best Regards,
CIMB Treasury & Markets Research-Fixed Income
Tel: +603 2261 8557 | Fax: +603 2261 8705
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