Monday, May 14, 2018

FW: CIMB Market Musings - 14 May 2018 - MY bonds quickly recover; more rallies possible



Market opened weaker. We had expected volatility immediately post-election. As it were, we had placed short-term risks being no smooth transition to the new government. Fortunately, transition was pretty smooth to the new government. This 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 this morning; as some players were still debating policy direction of the new government, and how this could affect the MYR currency and sovereign credit. 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).


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 rallying ahead of lunch time, with the 10y MGS back down to 4.16%. Meanwhile, supportive sentiment also came in for the MYR currency, which fell below 3.9500. Meanwhile, 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 possible. We recall that the bond market had succumbed to negative pressures due to uncertainties before the election; with the 10y MGS hovering 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 with the 10y UST below the psychological 3.00% level (at 2.97% at time of this writing).


Maintain target of 4.00% for 10y MGS end-2Q18. Earlier, we said we eyed medium term support for 10y MGS at ascending 10bps yield levels; eyeing 4.20% short term support, then on to 4.30% as next support. The higher yields represent good buying opportunities, thus the support levels. Nevertheless, as we said above, there is possibility for further rallies. Hence, we maintain expectation of 10y MGS target at 4.00% by end-2Q18.


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