Wednesday, May 16, 2018

FW: CIMB Fixed Income Daily - 16 May 2018 - Watch for dissenting vote(s) at BoT meeting today; MY bonds consolidate



CIMB Fixed Income Daily - 16 May 2018 - Watch for dissenting vote(s) at BoT meeting today; MY bonds consolidate


US Treasuries weakened sharply with yields up 6-8bps. The April retail sales number met expectations at 0.3% mom increase, and the prior month’s number was revised up to 0.8% (+0.6% prior estimate), though retail sales ex-autos moved at 0.3% mom or lower against 0.5% consensus. The curve steepened with the 2x10 spread at 50bps against 47bps the day before.



Malaysian government securities consolidated Tuesday after the prior day’s rally post-elections. On Tuesday, shorter-tenor bonds showed strength though yields fell moderately. Meanwhile, we think the mixed movement especially along the longer tenors reflected overnight weakness along the US Treasuries market. Nevertheless, in the short- to medium-term horizon, we think more rallies are possible. 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 aided by low inflation (CPI fell to just +1.3% yoy in March 2018) and Bank Negara unlikely to shift the OPR higher this year. Meantime, the US Treasuries market had shown strength recently. We maintain expectation of 10y MGS target at 4.00% by end-2Q18.



Thai bonds bear steepened to track UST movement. Thai govvies rose 2-5 bps within the intermediate segment of 2-8y maturities and rose 3-6bps along the far-end. Local investors reduced positions in Thai bonds before the policy meeting while foreign players were net buyers for a second day Tuesday.



The watch is whether today’s MPC meeting will have any dissenting vote favoring a rate hike. We expect MPC will keep interest rate unchanged at 1.50%. And the watch is if the meeting outcome reaches 6-to-1 or 5-to-2 vote to keep benchmark interest rate unchanged because  any dissenting vote to raise rates will add possibility of a policy rate hike in 2018. Based on historical MPC decisions from Aug 2011 to Feb 2018 there were 18 meetings with dissenting votes out of totaling 52 meetings and the 16 out of 18 meetings with dissenting vote results were turned into policy rate change in the following meetings (only the meetings in Mar 2014 and Apr 2014 showing divided votes were not followed by policy rate shift.) In other words, there is 89% chance of policy rate shift when the MPC do not reach unanimous decision. Moreover, there were always two or three consecutive meetings of dividing outcomes before the shift in the MPC rate.


As for our take, there is upside risk in yields staying at the front of curve. Front-end govvies faced headwinds from external risks amid bearish views on EM stocks, EM bonds, and weaker EM currencies together with domestic factors being increasing risks of an MPC rate hike after the meeting today and increasing Thai headline CPI in April at 1.07% yoy. Therefore, we maintain view on increasing rate of THBFIX-6 month to the first target of 1.50% in 6 months.


Indonesia’s government bonds were traded in range Tuesday before the release of the April trade data but fell after the trade balance showed a deficit of -$1.63b, or lower compared to prior month's $1.12b surplus and $1.1b forecast. Along the primary market, MoF held an IDR sharia bond auction and received IDR9.1t incoming bids (IDR5.53t two weeks ago). The government issued IDR4.055t against IDR4.0t target.


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