FI Research - Pressure-off on easing pedal (Part 2)

v In the first part of this report, we took a leap of faith on US economy. Since then, we are seeing increase in global bond yields that amplified by upward revision in inflation prospects. This sent shockwaves across other markets as well.

v In response, front-end of Malaysia IRS curves have almost completely price out rate cut expectations. Inflation premium due to higher oil prices and implementation of GST is creeping up. Having said that, we see low possibility of oil prices to move significantly higher from here and any increase will be much less than the jump in yields would suggest.

v Correlation between US/Malaysia rates have been lowered than average in recent weeks suggesting any sell-off in local rates can be seen as an opportunity to pay.

v Low likelihood of Bank Negara to cut policy rate along with expectation of US rate hikes will likely cause spread narrowing at the short end of curve. But stable US 5-yaer, 5 year inflation swap rate and build up in inflation expectation and risk of fiscal slippage in Malaysia implies a possible spread widening at the long end of the curve.