Friday, April 20, 2018

FW: CIMB Fixed Income Daily - 20 Apr 2018 - Relatively weak MY auction but short- to medium-term outlook is positive



CIMB Fixed Income Daily - 20 Apr 2018 - Relatively weak MY auction but short- to medium-term outlook is positive


US Treasuries as well as European bonds weakened as inflationary expectations increased. Leading the way was continued high crude oil price near and above $70 per barrel and expectation Saudi and Russia output cutbacks may be extended as representatives meet this weekend. Meanwhile, the Fed’s Beige Book report was bullish on the US economy despite warnings of trade disputes affecting growth whilst the Philadelphia Fed index rose to reading of 23.2 in April against 21.0 consensus and March’s 22.3. Meanwhile, the Conference Board reported its Leading Economic Index rose 0.3% in March with the February figure revised upward to +0.7% from +0.6% prior estimate.


Ringgit government bonds saw weaker movement in price on the back of auction of new MGS Apr’23 which saw relatively low bid-to-cover ratio of 1.563x (versus >2x YTD for RM4.0b issuances) for the relatively large RM4.0b tender size. Average yield was 3.757% with high at 3.780% and low 3.728%. There was a slight tail towards tender closing but yields were just slightly higher than our earlier estimate within 3.70-75%. WI was heard dealt 3.73% prior the tender close.


At 3.757% for MGS Apr’23 (which has slightly longer maturity than prior benchmark MGS Mar’22) remains fairly priced vis-à-vis the rest of the curve (3x5 spread of 20bps versus 12bps using MGS Mar’22) [Please see yield curve to the right]. However, we note that yields had surged since end-Mar 2018 amid a cautious mood and external headwinds. We think some pent-up demand could come in for shorter bonds in the coming weeks if risks abate, whilst domestic growth remains steady with inflation sputtering of late. Our expectation is for 3y MGS to hover near 3.45% by late 2Q18, which would mean 5y MGS has room to come down (yield-wise) in the same time period as well. If 3x5 spreads stay normalized around 20-25bps then the 5y benchmark may likely move down towards 3.65% (from current 3.76%) in the coming couple of months.


In Thailand, players relocated their funds to LB316A and LB326A from mid-term govvies as they grabbed opportunity of a steeper curve.  The auction of 2y BoT202B bond received firm demand with 2.0 bid-to-cover ratio and average yield 1.49% (below Thai policy rate at 1.50%). Local players continued absorbing new supply of the bond while foreign investors maintained net selling activity since global risk sentiment improved and the one dissenting vote for lifting Thai policy rate at the meeting on Mar 28.


IndoGBs were dealt weaker Thursday on thin volume following weak overnight US Treasuries. Activities were heavier on 10y maturities with benchmark bond FR64 leading the way. Interest was persistent at 6.69% though there weren’t much interest elsewhere along the curve. For the day, yields rose 4-6 bps


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