FI Research – Risk or Opportunity?

v Markets are split right in the middle either it is a right time to call for a major fixed income bear markets or not? v Move to price out deflation risks started but reflation is needed for yields to move higher. Wage pressure in G3 economies will intensify along with inflationary effect of monetary easing by European Central Bank and Bank of Japan. China is embarking on new expansionary path against a squeeze in cash market in June 2013. v With Ringgit Malaysia on depreciation bias, high foreign ownership of government bonds, risk of fiscal slippage and rising inflation expectations, yield curves are likely to steepen and volatility in rates to remain elevated. v Despite recent re-pricing, term premium is still low by historical standards and have a good chance of moving higher by 50-80 basis points from current position. We argue that upward pressure on 5-year interest rate swap (IRS) will be relatively stronger than 3-month KLIBOR as investors are demanding too little compensation for the risk that long-term rates will change.