Wednesday, June 6, 2018

FW: CIMB Fixed Income Monthly - May 2018 - Fed set to hike but yields may be capped

 

US Treasuries

Policymakers are set to hike to 1.75-2.00% come the 14 June FOMC meeting. If so, that would be the second rate hike this year, and should add upward pressure on yields. However, overall rise, in our opinion, will be capped as players will continue to be fixated on doubts on US and global growth prospects, and also the debate whether the Fed may indeed hike four times this year. As growth and inflation suggest further normalization of interest rates by the Fed, the risk is that there’s one hike too many. Bond markets are suggesting a fourth hike may not be warranted unless growth shows sturdier increases than currently. We eye 10T at 3.00-3.10% in short term period.

Malaysia

Admittedly, the market has remained cagey as players are still debating policy direction of the new government, and especially how this affects the sovereign rating. Main concern is fiscal impact from the implementation of the new government’s key election proposals such as abolishment of GST and re-introduction of fuel subsidies. However, on the last day of May, the new government via MOF Lim Guan Eng came out to share its target numbers. We are positive on the details coming out of the MOF and which should aid sentiment in the Malaysian bond market in the short term horizon. In any case, the MOF said the country is on pace to meet the prior targeted 2.8% of GDP fiscal deficit this year.

Indonesia

We expect a rangy domestic bond market in June due to the long holidays and expected rate hike by the Fed. Nevertheless, the IDR bond market remains supported by the rating upgrades by Fitch and Moody’s, inclusions in the Bloomberg Barclays bond indices and also due to very low domestic inflation. On the flip side high energy price will be negative to the bond market, as will monetary tightening by Federal Reserve. All taken in, we expect to see range of 6.9 and 7.2% for 10y bonds in the coming month.

Thailand

In the coming month, we expect a moderate increase in yields amid stabilized EM and investor demand. The solid fundamentals indicate a shift higher is not unreasonable with  1Q18 GDP at +4.8% yoy, the fastest in 5 years. Also, the CPI accelerated to 1.49% yoy in May, the fastest since Jan 2017 amid higher fresh food and energy prices. Core CPI grew 0.8% yoy the same month, reflecting a pick-up in domestic demand.

Also, the MPC voted to keep rates at 1.50% unanimously. Robust growth and inflationary pressure signal MPC may be about to reach limitation to low interest rates.

 

CIMB Treasury & Markets Research-Fixed Income

Tel: +603 2261 8557 | Fax: +603 2261 8705 

Find us on Bloomberg at CIMR <Go>

 

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