CIMB MYR and USD Monthly Fixed Income Commentary for Mar 2015

Good morning,

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

• Though Bank Negara held the OPR steady at 3.25% at the March MPC meeting, government securities remained supported as selected players were still pricing in easier monetary policy. Additional support came from a steady decline in short-term interbank rates, as well as safe-haven buying ahead of the FOMC meeting. Up to mid-March, month-on-month yield movement showed a firm 5-10bps decline for papers with 5-year or shorter maturity whilst longer dated rose 5bps. Meantime, foreign holding in government debt (conventional and Islamic) fell by a small RM430 million in February 2015 and their percentage holding remain a pretty high 29.3% of outstanding papers.
• On the flipside, a weak currency will continue to negatively influence Malaysia’s fiscal and credit outlook with the low crude price placing Malaysia’s debt at a disadvantage versus most emerging markets. Even though the market remains supported, we think that the pace of recent buying has resulted in slightly high valuations whilst swap contracts are a little too extended on the receiving side. We based this thought on assumption Bank Negara will stay put on policy for now, and while the Fed may not tighten it will keep the market somewhat fearful that they may do so. In addition, there are supply concerns with around RM10.0 billion of long term government debt auctions in the pipeline in April (including reopening of 7-year Sukuk Perumahaan Kerajaan).
• The next MPC comes early May, and by end-April we think there is resistance for 3-year MGS up to 3.48% and 10-year MGS up to 4.02% and next 4.10%. Our medium term 5X5 bond-swap spread target remains 25bps.  
• US Treasuries rallied post FOMC with policymakers downgrading their 2015 macro forecasts and basically removing their forward guidance on rates. Earlier expectations of a hawkish Fed had resulted in UST weakness before FOMC, though interest into the higher yielding Treasuries was also sparked as the ECB kicked off QE. Profit-taking activity occurred after yields plunged, and players are now apprehensive ahead of incoming macroeconomic data and mixed signals from Fed officials even after the dovish-sounding FOMC statement. The 10T was hovering just below the 2.00% level by end-March, but we see an approach to resistance levels amid cautious sentiment in lieu of more data and Fed-speak – we see 10T resistance at 2.30%. This week’s NFP is eagerly awaited.

· 
Revising longer term forecasts  

• In terms of longer term outlook and in light of recent changes in macro conditions and market trends, we have reduced our UST and MGS yields forecasts for 2015. Supported by monetary easing in the Euro Zone and Japan and wide spreads of UST yields against Euro papers and JGBs, continued support from domestic buying, and FOMC still being dovish. We now see the 10T ending 2015 at 2.50% (down from 2.75% our prior forecast).
• Our reduction in MGS yield forecast comes from our expectation of prolonged stable OPR, our in-house downshift in GDP and CPI forecasts, and continued foreign support despite weak Ringgit. There is further support coming from increasing interest into Islamic GIIs as Malaysian govvies sukuk are added into the Barclay’s Global Aggregate Index on 31 March 2015.