CIMB - MYR and USD Bond Market Report 1H2015

Attached is our half yearly Fixed Income Market report for 1H2015.

• The global economy showed weak performance in 1Q2015 which the World Bank attributed to broad-based slowdown in the emerging markets and slow output in the US. A recovery in high-income countries will gather momentum but a broad-based slowdown is underway in the developing countries. Global activity should be supported by continued low commodity prices and generally still-benign financing conditions, notwithstanding the monetary tightening in the US. As for Malaysia, we were encouraged by the 1Q2015 GDP, in particular the stronger 7.9% expansion in total investment despite recent headwinds from a mixed global outlook, weaker commodities prices and GST implementation.
• US Treasuries finished 1H2015 with yields hovering near their highest since September 2014. Players had been pricing in inevitable Federal Reserve rate hike. We think the direction in yields would still be on uptrend in 2H2015 as we see the Fed finally hiking the Fed Funds Rate in the coming months.
• After a volatile 1H2015, we see higher MGS yields in 2H2015. For shorter tenor MGS, seeing that yields are very tight right now, the uptick will at first be led by a measure of profit taking, especially if the USD/MYR lingers above 3.8000. Capping the increase in short term yields will be Bank Negara maintaining monetary policy the rest of the year. We also think that foreigners will sustain their interest in short tenor Ringgit govvies, given the still large yield disparity against global levels. For the 10-year MGS we expect a smaller rise towards around 4.15% by year-end. A good gauge for how much medium to longer tenor Ringgit yields will rise in 2H2015 will be how soon the and how much the Fed tightens its policy.