CIMB MYR and USD Monthly Fixed Income Commentary for Feb 2015

Good afternoon,

Attached is the monthly market commentary for February 2015. We have included the near term outlook for the month of March 2015.

Synopsis

• Ringgit bonds showed strength as players priced in possibility of an OPR hike in the short term period. There was added support from higher crude oil prices. Elsewhere, US Treasuries slumped with yields surging and the curve steepening. Players priced in possibility of a sooner-than-expected Fed rate hike.

Outlook

• MPC meeting is slated for tomorrow 5 March 2015. CIMB does not think Bank Negara will act to cut the OPR anytime soon, but in case this happens we expect a rally to follow in the MGS market. Otherwise, some profit taking along the short end may occur but we expect players to mainly lock in current yield ranges.
• Crude prices and global currencies trend will continue to influence Malaysia’s fiscal outlook and corporate credit scenario. These will have direct impact on demand for govvies and corporate bonds. Meanwhile, we will monitor US Treasuries and other global yields arising from loose monetary policy in Europe, China, Japan, Thailand and Indonesia, which will exert influence on Malaysia’s spread levels. We expect Malaysia to continue to be under the radar of foreign investors whilst maintaining its premium over most developed and EM countries (except for Indonesia, Philippines and the troubled EU nations like Greece). The 10-year spread of Malaysia over the US is about 179bps, Japan 354bps, Germany 356bps, Thailand 130bps, Singapore 158bps, and Korea 157bps. On the other hand, Indonesia has 313bps spread over Malaysia, and Philippines 10-year government bond carry a minimal 0-5bps spread over Malaysia’s. Further rate cuts by Bank Indonesia will shrink Indonesia’ premium (the spread had shrunk from about 405bps in past three months, as per following table).
• US Treasury yields reached above 2.10% yesterday up from around 1.65% a month before. Essentially, players are readying for the eventual Fed hike. However, not all players are expecting a quick hike in early 2H2015, as some are of the opinion that Janet Yellen sounded pretty dovish during her testimony to Congress recently. Thus, US Treasuries movement into the short to medium term period is very hard to gauge. And we think a large factor on the UST trend from now on will be incoming data, such as whether jobs continue to show strong growth and whether consumption and investments show strong rebound. For the moment, we think UST will show further weakness in the short term though the yield upside will be limited depending on macro data. We also take into account that more of the Fed officials except for the Fed chief Yellen sounding remarks that a tightening of interest rates may not be too far off. We think there is strong resistance for the 10T at 2.40%.