FI Research – Septemberist?

v Markets are having a split decision if US Fed Reserve will go ahead to raise policy rate after the release of July’s dovish FOMC minutes. Confidence for a September’s liftoff is indeed waning as probability dropped to 27% from 43%. v Despite this uncertainty, we are still a proponent that bonds are entering a multi-year bear market given the extent of US’ immunity to withstand higher real bond yields. We estimate fair value of US 10-year bond yield to be around 2.55-2.75%. Based on historical pattern, Fed rate hikes have triggered an increase in volatility and typically a bear flattening of yield curve and US dollar supportive. v Asian yields tend to respond positively to changes in US treasuries. Singapore, Korea and Malaysia have higher than Asian’s average positive response rate to US treasuries. In the case of Malaysia, we note rising correlation of local rates against US yields in post-crisis period. v Key point to note is if local rates, especially short-end of the yield curve have fully priced-in for US treasuries given the current depreciation path of Ringgit Malaysia.