US Treasuries &
Asian Dollar-denominated Bonds
We expect US Treasuries to remain supported in the short term period, to sustain its recent gains during the month of Mar. As the Fed decided to maintain the FFR at 0.25-0.50%, Janet Yellen’s dovish remark has further pressured yields lower heading. Moreover, the Fed now sees a possible 50bps hike in rates in 2016, instead of 100bps projected before. Meantime, the market has priced in the more gradual rate hike path, as the Fed Fund futures trading implies a 23.5% chance of hiking rates in the Jun FOMC meeting, down from 38.0% probability as recorded earlier in Mar.
Meanwhile, recent economic data had not been very strong, even as non-farm payrolls have averaged an increase of about 210k per month in Jan-Mar 2016. Elsewhere, in a note this week, economists at the San Francisco Fed said there is now a notable downward shift in inflationary expectations (medium- to long-term horizon) supported by declines in market-based inflation measures (and controlling for risk premiums and liquidity). This is in contrast to Yellen’s recent remarks that signaled that decline in market base inflation gauges were primarily due to risk premiums and liquidity concerns. All in, we see support to the US Treasuries in the near term period, capping the 10T below 2.00%.
Malaysian Bond Market
We expect cautious support for both Ringgit government and corporate bonds in the short term period. Support for bonds will be led by bets on interest rates, as well as inflation direction and fx if the Ringgit remains strong (talks with our traders suggest a strong resistance at 4.1000). The dovish FOMC and Bank Negara will remain priced in. The Fed is likely to hold off a rate hike in 1H2016, whilst there is still possibility of an OPR cut (or two) this year if conditions CIMB economists’ call for a 50bps cut in OPR in 2H2016 assumes 1) market stabilization to continue, placing less pressure on the MYR, 2) inflation to ease significantly from 2Q2016, and 3) global economic growth to disappoint. permit. In addition, we expect inflationary pressure to begin to subside - starting with the upcoming Mar 2016 CPI. The high +4.2% CPI for Feb (driven by low-base factor and GST impact from Apr 2015) is likely to be the high this year. Our economist expects CPI to ease to 4.0% in Mar and trend lower thereafter to 2.7-3.5%. There should be more price adjustments for administered goods in the coming months and normalization in petrol prices later this year. We maintain our 2016 CPI forecast at 3.5%. By end-month, we expect to see the 3-year MGS to strengthen towards 3.10-3.15%, primarily pricing in the dovish Bank Negara and support from the firmer Ringgit.
Thai Bond Market
Thailand’s bond market is another which has been supported by dovish signals by its central bank so far this year. CIMB economists see potential for BoT to cut its policy rate down to 1.00% by year-end (1.50% currently) as growth remains at risk. However, after continuous gains since the start of this year (medium tenor yields down 100bps), there are now signs Thai govvies are now in heavy overbought position. Despite the dovish BoT, the next rate cut may not come for some months as Thailand is also focusing on fiscal spending to prop its weak economy, at the same time speculation of Fed hikes will heighten. Meanwhile, possible weakening of the THB currency when Fed hike talks return will also pile additional pressure on bonds. We expect mild increases 5-10bps for short tenor Thai govvies in the short term horizon.
Indonesian Bond Market
We expect the bond market to strengthen further in Apr. Support will come from an increasingly conducive price environment on the heels of the recent domestic fuel price cut, and in anticipation of a fourth rate cut by BI. As the government cuts domestic fuel price by 7-8%, inflation is projected at +3.90% yoy in Apr assuming a month-on-month deflation of 0.20%. Our expectation is that the BI has room to cuts its benchmark policy interest rate to 6.25% in 2016.
We expect US Treasuries to remain supported in the short term period, to sustain its recent gains during the month of Mar. As the Fed decided to maintain the FFR at 0.25-0.50%, Janet Yellen’s dovish remark has further pressured yields lower heading. Moreover, the Fed now sees a possible 50bps hike in rates in 2016, instead of 100bps projected before. Meantime, the market has priced in the more gradual rate hike path, as the Fed Fund futures trading implies a 23.5% chance of hiking rates in the Jun FOMC meeting, down from 38.0% probability as recorded earlier in Mar.
Meanwhile, recent economic data had not been very strong, even as non-farm payrolls have averaged an increase of about 210k per month in Jan-Mar 2016. Elsewhere, in a note this week, economists at the San Francisco Fed said there is now a notable downward shift in inflationary expectations (medium- to long-term horizon) supported by declines in market-based inflation measures (and controlling for risk premiums and liquidity). This is in contrast to Yellen’s recent remarks that signaled that decline in market base inflation gauges were primarily due to risk premiums and liquidity concerns. All in, we see support to the US Treasuries in the near term period, capping the 10T below 2.00%.
We expect cautious support for both Ringgit government and corporate bonds in the short term period. Support for bonds will be led by bets on interest rates, as well as inflation direction and fx if the Ringgit remains strong (talks with our traders suggest a strong resistance at 4.1000). The dovish FOMC and Bank Negara will remain priced in. The Fed is likely to hold off a rate hike in 1H2016, whilst there is still possibility of an OPR cut (or two) this year if conditions CIMB economists’ call for a 50bps cut in OPR in 2H2016 assumes 1) market stabilization to continue, placing less pressure on the MYR, 2) inflation to ease significantly from 2Q2016, and 3) global economic growth to disappoint. permit. In addition, we expect inflationary pressure to begin to subside - starting with the upcoming Mar 2016 CPI. The high +4.2% CPI for Feb (driven by low-base factor and GST impact from Apr 2015) is likely to be the high this year. Our economist expects CPI to ease to 4.0% in Mar and trend lower thereafter to 2.7-3.5%. There should be more price adjustments for administered goods in the coming months and normalization in petrol prices later this year. We maintain our 2016 CPI forecast at 3.5%. By end-month, we expect to see the 3-year MGS to strengthen towards 3.10-3.15%, primarily pricing in the dovish Bank Negara and support from the firmer Ringgit.
Thailand’s bond market is another which has been supported by dovish signals by its central bank so far this year. CIMB economists see potential for BoT to cut its policy rate down to 1.00% by year-end (1.50% currently) as growth remains at risk. However, after continuous gains since the start of this year (medium tenor yields down 100bps), there are now signs Thai govvies are now in heavy overbought position. Despite the dovish BoT, the next rate cut may not come for some months as Thailand is also focusing on fiscal spending to prop its weak economy, at the same time speculation of Fed hikes will heighten. Meanwhile, possible weakening of the THB currency when Fed hike talks return will also pile additional pressure on bonds. We expect mild increases 5-10bps for short tenor Thai govvies in the short term horizon.
We expect the bond market to strengthen further in Apr. Support will come from an increasingly conducive price environment on the heels of the recent domestic fuel price cut, and in anticipation of a fourth rate cut by BI. As the government cuts domestic fuel price by 7-8%, inflation is projected at +3.90% yoy in Apr assuming a month-on-month deflation of 0.20%. Our expectation is that the BI has room to cuts its benchmark policy interest rate to 6.25% in 2016.
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