US Treasuries posted modest gains, after NFP showed a stronger-than-expected increase of 213k in June (against +195k consensus expectation) but average hourly earnings was short of expectation at +0.2% mom (versus +0.3% consensus). Meanwhile, global trade concerns were elevated after countries especially China hit back at Trump’s tariffs –imposing 25% tariffs on 545 US products worth $34b. Trump had imposed 25% tariffs on $34b Chinese products.
As it were, the US Treasuries yield curve was at its flattest in 10 years with the 2x10T spread at 28bps from about 60bps at end 1Q2018 when the 10y yield was nearer to 3.00%. Keeping the UST curve flat was last week’s release of the June 2018 FOMC minutes which confirmed policymakers’ agenda for continued but gradual rate hikes. However, policymakers also signaled they are watching for signs of slack in economic growth, especially as trade concerns have accelerated. This ensured longer tenors pared any rise in yields especially as Trump was preparing to impose 25% tariffs on $34 billion of imports from China. China had indicated it will retaliate, raising real doubts on global trade and growth prospects.
Last Friday, Malaysian government bonds closed steady, though there was some weakness along selected benchmark papers. Yet for the week, bonds generally strengthened. Gains were led at first by net buying interest along off-the-run (or non-benchmark) papers as well as along the Islamic GII segment. We noted there had been recent absence of large corporate bond offerings especially of higher grade AAA-rated and government-guaranteed bonds. We think this absence spurred the demand for the non-benchmark and off-the-run papers which offer attractive spreads against the benchmark papers. Then, nearer the end of the week, benchmark bonds showed strength with 5-10y papers down 5-7bps for the week. We expect continued demand for MGS this week even as we head towards MPC meeting mid-week (the first with new Bank Negara governor Datuk Nor Shamsiah but we expect the central bank to remain accommodative).
IndoGBs rallied as we noted signs of demand from foreign onshore banks. As the market saw incoming bids there was also thin supply as locals were a bit reluctant to sell. After lunch, we started seeing more action as FR64 hit 7.50%. Volume traded fell to IDR10.2t with flows mainly seen along the tail end of the curve.
In Thailand, net selling pressure on LB316A and LB326A led losses especially within 5-18y segments but yields rose mildly by 1-2 bps due to support from UST gains in the pm session. Overall activities in Thai bonds remained relatively quiet as investors continued interpreting impact from US imposing tariffs on China's product. The auction of 14d CB drew firm demand at average yield 1.1739% and 1.69 bid-cover compared with last sell on 29 June at average yield of 1.2205% and 1.87 bid-cover.
CIMB Treasury & Markets Research-Fixed Income
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