CIMB - MYR Bond Market Report 1H2014

Attached is our half yearly Fixed Income Market report for 1H2014

• We anticipate steady growth for the US economy into the medium term horizon, despite the US showing a sharp contraction of 2.9% qoq in the 1Q2014 GDP number.
• We think the UST yield curve will come under gradual steepening pressure in 2014-2015.
• The Fed is planning a strategy of gradual interest rates hikes in the coming 1-2 years. After the 19 June 2014 FOMC meeting, policymakers hinted interest rates would remain low until the middle of 2015 when we think the Fed will start to hike.
• Our view is that longer tenor 10T is overvalued and should hover way above the current 2.60% by now. We think fairer value of the 10T should be around 3.00% at this juncture.
• We expect Bank Negara Malaysia to hike the Overnight Policy Rate (OPR) to 3.25% in 2H2014.
• Another hike in the OPR up to 3.50% will come in 2015, and will depend on the trend of economic data coming in, especially signs of inflationary pressure.
• Up to end 2014, we foresee limited steepening of the MGS curve, as players will continue to shorten duration. The short tenor 3-year MGS should consolidate around 3.45-3.50% by end 2014, and will only test highs approaching 3.75% heading into late 2015. Meantime, the 10-year MGS will hover around 4.25% by end-2014 and test 4.50% in 2015 as the market prepares for further monetary tightening.