Monday, May 28, 2018

FW: CIMB Fixed Income Daily - 28 May 2018 - Little reaction in bond market from MY government debt reveal



CIMB Fixed Income Daily - 28 May 2018 - Little reaction in bond market from MY government debt reveal


US Treasuries continued to gain last Friday. Safe haven demand amid geopolitical risks saw support for UST as Trump called off his planned meeting with North Korean officials. Trump said the US was seeking ‘full denuclearization’ but the North Koreans had signalled that nuclear disarmament would not be discussed. Reports also emerged that the Trump administration was considering imposition of tariffs on imported cars for ‘national security’ purposes. After the risk-on sentiment seen since the prior weekend’s US-China trade truce, investors were caught by the sudden change in sentiment. Boosting the demand for UST was release of the latest FOMC meeting minutes which was viewed on the dovish side. The minutes affirmed outlook for a June hike, but was not alarmed on inflation. We note that the last FOMC meeting saw statement from policymakers that inflation may be allowed to temporarily hover above 2% before further tightening occurs.


Malaysian government bonds moved mixed Friday. As it were, bonds remained firm despite some post-election concerns in the past week. These include news reports suggesting the Ministry of Finance (MOF) was investigating whether it needs to step in to cover some GG debt servicing in the short- to medium-term period.


Meantime, announcement by MOF that Malaysia’s government debt stood at slightly more than RM1.0t also did not result in a major sell down in bonds. Essentially, the local bond (and currency markets) reacted little as their participants are pretty much aware of the level of the contingent liabilities; and these are represented by government-guaranteed bonds and bonds by government SPVs (such as for private-and-public sector partnership projects) issued over the past few years. The bond market seemed appreciative of the government’s clarity to its own credit health as it entailed those liabilities which it thinks it will have to repay (as it indicated the SPVs raising these debts may not have adequate future cash flows to service their own debt). The clarity aids investors because it reveals the potential liabilities the government may have to burden. We note that GG bonds which the government thinks the issuer or SPV has potential to repay themselves are not included in the new RM1.0t sum. These include GG bonds issued by prominent GLCs such as Tenaga Nasional or Petronas. And this is a relief to the market as the government acknowledges the already widespread market perception that the government most probably will not have to shoulder those debts. In fact, confirmation by MOF of the 50.8% to GDP official debt of the government amounting to RM686.8b (namely MGS+GII or other direct GOM issued debt) was also a welcome relief seeing that no additional debt was added to this official figure.


Aside, after the recent weaker than expected auction of the 10y MGS, new supply continues to come in heavy. The central bank announced it will sell RM4.0b of new GIIs maturing Nov’23. Tender closing for the new 5.5y GII is Wednesday 30 May. The coming auction we think may not garner very strong demand, considering the pre-existing generally weak sentiment in the market, as well as relatively large tender amount. WI was last on Friday around 4.10/00%.


Indonesian government bonds bull flattened Friday, with most interest focused on 10-15y tenors, as well as 20y maturities. Support for IndoGBs was especially current thin supply. Volume increased to IDR16.9t whilst trade concentration stayed at the tail of the curve.


Thai government bonds were mostly firmer last Friday, with support seen from offshore. Thai BMA data reported foreign investors were net buyers of Bt2.5b in Thai bonds on Friday. UST gains helped sentiment whilst upbeat growth but controlled inflation aided TH bonds.


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