Wednesday, May 2, 2018

FW: CIMB Fixed Income Daily - 02 May 2018 - US Treasuries in cautious mood before FOMC, NFP



CIMB Fixed Income Daily - 02 May 2018 - US Treasuries in cautious mood before FOMC, NFP


US Treasuries closed weaker on Tuesday, up 2-4bps, on reportedly slow trading since we have FOMC due mid-week. However, losses were pared amid the cautious mood. Earlier on Monday, yields fell with 10T down towards 2.97%, but aided by the closed market in Tokyo. Monday saw the core PCE number came out at 1.9% for the month of March, which is a firm number which meets Fed’s median projection for 2018, or up from 1.6% the month before as well as meeting the March projection.


On top of PCE, this week will see release of important macroeconomic data; including non-farm payrolls (consensus +191k for April against +103k in March) and durable goods, and FOMC meeting as well. There’s only 34.2% probability imputed by futures trading for a rate hike at this week’s FOMC. On Tuesday, the ISM manufacturing index saw weaker reading of 57.3 for the month of Apr, or down from 59.3 the prior month and below consensus of 58.5.


Fed funds futures trading is pricing in only 34.2% probability of a rate hike this week, but up towards 63.2% at the June 2018 FOMC. Much of what could happen at the June FOMC may be signaled by the Fed statement this week. Still, we expect continued signaling of gradual rate hikes this year, resulting in high chance in a June hike.


Malaysian government bonds posted further gains last Monday. However, flows were limited on select tenors which translated into the large movement in yields. Gains were led by short dated papers. We noted the 3y MGS down 12bps. Spur for better sentiment was UST which moved no higher than 2.97% (though aided by closed market in Tokyo).


We expect US Treasuries to hold steady near 3.00% in the short to medium term as higher UST yields than currently should require stronger incoming macro data especially inflation. In fact, weak inflationary outlook is what’s driving a flat US curve, recently the flattest since before the global financial crisis of 2007/2008. Our views on 3y and 10y MGS fair value for 3Q18 are 3.55% and 4.05% respectively (see Fixed Income Navigator report published on 16-Mar-2018). We had expected overweight 3y versus 10y MGS for a bullish steepener at target 3x10 MGS spread of 50bps. This spread level was hit on Monday. We think 3y MGS has legs down to 3.60% in short term period.


On Monday, Thai bond curve flattened as long-end yields decreased with firmer 10y UST while front-end yields rose with weak auction of 6m BOT bond (CB) with long-tail result or high yield at 1.48%. Front-end yield was under upward pressure since last week due to UST sell-off as well as increasing supply risk after BOT announced  on 27 Apr to  increase notional amount of 3m and 6m BOT bonds from Bt35b  from Bt30b since 15 May causing total increase in supply about Bt30b in May 2018.


IndoGBs strengthened Monday due to offshore demand. The 5y bond was traded at 6.31% at the highest before the afternoon session. Yields fell 11bps from last Friday though the upside was limited due to profit taking pressure. The market quieted down heading to closing time. Yield fell 4bps on average.


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