CIMB Daily Fixed Income Commentary - 31 May 2016

Market Roundup

• The UST market was closed for US holiday Monday and saw little movement elsewhere.
• In the coming week we have personal spending, ISM manufacturing, and ADP jobs leading up to the May non-farm payrolls to be released Friday. Consensus for May NFP is 160k or similar the Apr number. However, also important are the average hourly earnings figures. Consensus expectation is +0.2% mom, which will sustain the 6-months moving average above +0.2% after a slight dip in Feb.

·  With the changing sentiment post remarks by Yellen, we expect UST movement to be weak though after some consolidation on month-end demand. Short term target for the 10-year UST is 1.93% before next resistance at 1.98% which completes a 100% retracement towards levels last Oct. Levels a couple of bps below 2.00% seemed to have been major inflection points since end-2014.

• Malaysian government bonds as well as the Ringgit weakened as sentiment was negatively affected by Yellen’s remarks last Friday which fuelled concerns over a Fed hike come the Jun FOMC meeting. USD/MYR was around 4.1155 late Monday versus 4.0779 last Friday. The adverse situation affected the day’s auction of new 5-year MGS (MGS Nov’21) worth RM4.0 billion. Demand was very weak with bid-to-cover ratio at 1.42 times. The average bid-cover at the 10 prior MGS/GII auctions was much higher at 2.418 times. Meanwhile, average yield generated at the latest auction was 3.62% which tailed from WI levels of 3.57/54% in the morning session.
• Short term period, we expect sustained pressure on MGS yields as we head closer to the FOMC meeting 14-15 Jun. Yields will be pressured upwards, with the new 5-year MGS should now sustain above 3.60%.
• Thai government bonds ended mixed with the yield curve flatter. Short dated bonds weakened alongside pressure on THB post-Yellen remarks (USD/THB around 35.745 late Monday). However, we noted steadier yields along select longer dated bonds including the 10-year ThaiGB Dec’25 at 2.00%. We think strength along longer bonds come ahead of inflation data release Wednesday. Consensus for the May CPI remains a pretty weak +0.24% yoy versus +0.07% in Apr whilst consensus for mom CPI is +0.40% versus +0.55% in Apr.
• We expect pressure on THB and THB bonds to sustain as we head to the 14-15 Jun FOMC meeting. Towards the FOMC date, we expect the 5x5 swap spread to widen – target 15bps from last week’s entry of 8bps. In addition, the BoT policy meeting is scheduled for 22 Jun but consensus is that the central bank will not budge yet on interest rates, which means sustained pressure on bonds.
• Indonesian government bonds drifted lower post-Yellen comments, although the start of the day was promising with some buying actions by local players around the 20-year tenor, and met by persistent offers. This week MoF will be holding syariah bond auction with IDR4 trillion target, we expect the auction to generate more demand in the 2- and 15-year tenors. Market volume dropped to IDR5.3 trillion only and dominated by bonds maturing in over 10 years (41%) and money market papers (35%).