Monday, April 23, 2018

FW: CIMB Fixed Income Daily - 23 Apr 2018 - Bonds remained under pressure amid weak US Treasuries



CIMB Fixed Income Daily - 23 Apr 2018 - Bonds remained under pressure amid weak US Treasuries

US Treasuries remained under pressure. The reduction in global risks was because the situation in Syria and possible trade conflict between the US and China have not seriously escalate; but this reversed demand for safe-haven government bonds such as US Treasuries. Added pressure on Treasuries was Federal Reserve policymakers who were mostly heard saying the central bank remains on course for interest rate hikes this year. These include current San Francisco Fed president and next New York Fed president John Williams who quipped that the neutral policy rate is 3.00%, after he earlier said US inflation will hit 2.0% this year. The Fed also released its latest Beige Book update on the US economy. The report indicated the Fed’s 12 economic districts in the US continued to expand at a modest to moderate pace during the March to early April 2018 period, whilst adding widespread employment growth also continued.


Malaysian government bonds and the MYR weakened against a stronger USD whilst global sentiment remained cautious. Leading the flows was the new 5y MGS (MGS Apr’23) at day high of 3.80%, followed by short dated off-the-run MGS Oct’19 which rose 8bps to 3.53%%. USD/MYR was seen near 3.8945 late Friday.


Priced at auction at 3.757% for the new MGS Apr’23 (which has slightly longer maturity than prior benchmark MGS Mar’22) gave 3x5 spread a wider 20bps versus 12bps using MGS Mar’22. 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.


Thai bond yields inched higher across the curve with the worst performer at the front-end and mid-ends with yield ending Friday up 1-2bps. Foreign investors stayed selling at the front-end throughout the week (totaling amount of net sell position of short-term bonds at Bt6.6b). Last week, Thai govvies ended with losses led by underperforming of short-ends and long-ends. The yields shifted higher 2-5bps for 1-7y segment and back-end yield rose 4-5bps accelerated by soft auction result of 30y LB466A. This can be explained by improving global sentiment that lessened demand for holding fixed income securities and caused new high on the 10y UST yield. This week’s auction of LB22DA is a close watch whether current rising yield environment will be able to attract large amount of regular buyers or the buyers waiting for higher yields.


IndoGBs were traded weaker again Friday as Rupiah depreciated to beyond 13850. Local players were seen supporting IndoGBs, with 10y benchmark FR64 bids strong at 6.80%. In general, activities in bonds were not much aside from the 10y maturities.

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