Wednesday, July 18, 2018

FW: CIMB Fixed Income Daily - 18 Jul 2018 - UST yields edge higher as Powell reinforces Fed?s intentions



US Treasuries weakened but yields were only slightly higher as Fed's Jerome Powell gave his testimony to Congress (senate banking committee). Powell gave an upbeat assessment of the economy and reiterated Fed's aim to gradually hike interest rates. As for macro data release, industrial production grew 0.6% in June against downward revised 0.5% contraction the month before.


As it were, the curve remains near its flattest in 10 years with the 2x10T spread at 24bps versus about 60bps at end 1Q2018 when the 10y yield was nearer to 3.00%. Fed tightening trajectory but threats to inflation and growth are drivers for the flat curve currently. The recent FOMC minutes confirmed policymakers' agenda for continued but gradual rate hikes. However, policymakers also signaled they were watching for signs of slack in economic growth, especially as trade concerns have accelerated. Last Friday, players heard points from the Fed's semiannual monetary policy report, in which it signaled no need to speed up pace of rate hikes after inflation hits 2.0%. The Fed's forecast range for PCE inflation is 2.0-2.1% in 2018, 2.0-2.2% 2019 and 2.1-2.2% 2020. However, last week US CPI came out at 2.9% yoy in Jun to meet consensus or the highest since Feb 2017. We're expecting the 2x10 spread to widen in the short term period at target 30bps spread in the short term period, to be led by gains (yields to fall) along 2y notes.


Gainers edged out losers in the Ringgit government bonds market. Sentiment remained supported after last week's Bank Negara Malaysia MPC as well as reported bids from offshore since over a week ago. However, nervousness ahead of this week's CPI release and continued global trade worries also left offers in the market as well. Malaysia's CPI for Jun has consensus at +1.3% yoy compared with +1.8% increase the month before, but after having dwindled to a growth of 1.3-1.4%% in the two months before that. We remain upbeat Malaysia's bonds. The neutral-to-dovish tint in the latest MPC statement amid low inflation should continue to support the underlying demand for MGS ‑ reflected in the recent rally with 10y MGS nearer to 4.10% currently after rising to above 4.20% during May-Jun 2018.


IndoGBs were traded weaker as the government held auction, weakness especially on auctioned benchmark 5y, 10y and 20y papers. However, the government upsized the issuance to IDR20t from IDR10t target, and receiving good incoming demand of IDR38t. The 5y FR63 and 10y FR64 were issued at IDR 4.75t and IDR6.5t, respectively, with bid-to-cover ratio 1.43x and 1.33x.


Thai bonds were actively traded in the late session as foreign investors purchased long-term govvies for two straight days pulling the yields of LB296A, LB316A, and LB326A lower by 1-2bps. Meanwhile, funds rotation before the auction of 20y LB366A on Wednesday increased the yield by 1bp and our observation suggests decent demand from insurance companies should help underwrite the bond smoothly as bidding yields rose to good level to buy at 3.30%. The auction of 3m and 6m CB with each notional amount of Bt35b was able to draw market attention with higher 1.85x and 2.72x bid-cover and slight higher yields of 1.3753% and 1.5077%, respectively due to some purchasing interest from asset managers who needed to allocate funds before 3y BoT187A with outstanding amount of Bt126.5b


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