CIMB MYR and USD Monthly Fixed Income Commentary for Dec 2014

Monthly market commentary for December 2014. In addition, we have included the near term outlook for the month of January 2015.

Synopsis

• Malaysian Government Bonds slumped, coinciding with the vastly weaker ringgit levels and worries over the health of Malaysia’s fiscal position into 2015 amid the tumble in global crude oil prices. The USD/MYR pair ended 2014 at 3.4965 (2013: 3.2785) whilst Malaysia’s Tapis oil price ended at $58.62 per bbl (2013: 120.68).
• US Treasuries ended on a mixed note. Longer dated UST rallied amid expectation of continued low interest rates and lower inflation expectation. Meantime, shorter dated securities were pressured after the recent hawkish Fed officials’ statements and non-farm payrolls for November exceeding expectations (+321k versus +243 October).

Outlook

• We think it will be a testy month for ringgit bonds in January 2015, precisely because ringgit levels looks likely to weaken further. The downbeat outlook for ringgit bonds will be exacerbated by the firm demand for US dollar assets and support for Euro Zone and Japanese government bonds. Our view on the USD/MYR pair is up towards 3.6000 by end of 1Q2015, 3.6200 2Q2015, 3.6500 3Q2015 and 3.7000 end of 2015.
• For a longer term view, we expect MGS to show a mixed trend in 2015. With Bank Negara expected to hold interest rates steady, shorter tenor bonds are expected to hold steady. The 3-year MGS now hovering near 3.60% should consolidate downward to around 3.50% before closing 2015 near 3.60%. Even though short term interest rates should remain steady most of 2015, talk of higher interest rates going into 2016, inflationary pressure and expected rise in UST yields will lift long tenor yields. Other than the 3-year MGS at 3.60% end-2015, we see the 5-year MGS near 3.80-90% and the 10-year MGS around 4.50%. Thus, the MGS yield curve will steepen in 2015, versus the flat curve at end 2014. As for Corporate bonds, we expect credit spreads to widen in 2015. Credit spreads had tightened ahead of end-2014 as MGS yields shot up. In 2015, shorter tenor credit spreads will widen as we think shorter dated MGS yields will show a decline. However, the expected widening in longer term spreads will be led mostly by rising credit yields themselves. Taking the AA1 credit spreads as example, the 5-year AA1 credits spread tightened to around 50bps end-2014 from range of 60-80bps earlier in the year. We expect the spread to normalize back to within the 60-80bps range by mid-2015.
• US Treasuries will remain supported in the near term. Reasons for these, in our opinion, include political concerns including anticipated elections in Greece, weak performing economies in the Euro Zone and Asia (warranting low global bond yields), and FOMC members offering little hints of when they will start to hike interest rates this year. In any case, the FOMC decision is awaited for 29 January 2015. Ironically, if come 29 January and FOMC members do place in stronger signals that rate hikes will come sooner than expected, we still think UST yields will remain within the current lower ranges. Reasons for this is because players need greater confidence that the US economy is on stronger growth path (recent strong GDP and NFP data notwithstanding) and that a premature rate hike will just disrupt this growth trend - spurring a sell-down in the equities markets and boost the allure of the safe haven UST. That in mind, we think short term resistance for the 10-year UST is around 2.35-2.40%.