Tuesday, May 15, 2018

FW: CIMB Fixed Income Daily - 15 May 2018 - UST again stops at 3.00%; MY bonds quickly recover



CIMB Fixed Income Daily - 15 May 2018 - UST again stops at 3.00%; MY bonds quickly recover


The US Treasuries market moved weaker but the 10T again stopped after touching 3.00%. There was little in terms of fresh market drivers. However, some ease in trade tensions was negative for the safer haven UST. Trump signaled it will help the business of Chinese telco ZTE, ahead of high level trade talks scheduled for later this week in Beijing. Also not helpful for bonds was Cleveland Fed president Mester, who’s an FOMC voter, saying interest rates could go higher at a faster pace if growth warrants it. Mester also said the US should guard against debt-to-GDP getting ‘out of hand’. Debt-to-GDP is about 75% and controlling it could place limits on fiscal expansion (though the Fed is not responsible for that side of policy).


Thai bonds were traded in a tight range with yields at the back-end higher about 1bp and less than 1bp higher for the other parts of the curve. Resilient trade in Malaysia’s market aided sentiment in the Thai bond market before MPC policy meeting on 16 May. Consequently, foreign investors turned net buyers on Monday for the first time since 30 April.


IndoGBs and IDR currency were traded weaker on Monday after the terrorist bombings in five locations in Surabaya and bomb threats in Jakarta. We suspect there was outflows from some foreign players. Yields rose on average by +10bps. However, movement was limited to the front and belly of the curve. Volume fell to IDR13.8t with trade concentrated at the tail.


As for Malaysia, markets rallied. We had expected volatility immediately post-election. Fortunately, transition was pretty smooth to the new government and placed a huge relief to market sentiment. Also, formation of the ‘elder’ advisors group to the government aided sentiment. However, some risks remained as the market opened Monday morning; as some market players were still debating policy direction of the new government. Due to this, it was little surprise that there were adjustments to the weaker side in the government bond market in the morning of the first day of trading post-election. We noted the 10y MGS rose to around 4.27% (or up 11bps from 4.16% before election). However, markets rallied soon after (including stocks and Fx). As mentioned above, players took in as positive the smooth transition to the government and formation of council of advisers. As it were, MGS was rallied ahead of lunch time, with the 10y MGS down to 4.16%. Meanwhile, supportive sentiment also came in for the MYR currency, which fell below 3.9500. Also, Malaysia’s stock market recovered with FBMKLCI index back up near 1860 point level by midday after it was below 1800 early in the day. Elsewhere, RM3.0b auction of GII Aug’25 today saw very strong demand at 3.40x bid-cover and average yield 4.202% after WI touched 4.29/20%.


More rallies are possible as we recall that the bond market had succumbed to negative pressures due to uncertainties before the election; with the 10y MGS near 3.95% early-April 2018 (and rising to 4.16% the day before the election). Now at post-election, with short-term uncertainties left behind, there is possibility there will be additional rallies to come. We base this on outlook for steady GDP growth outlook this year aided by very moderate inflation (CPI fell to just +1.3% yoy in March 2018) and Bank Negara unlikely to shift the OPR higher. Meantime, the US Treasuries market had shown strength recently. We maintain expectation of 10y MGS target at 4.00% by end-2Q18.



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