CIMB Daily Fixed Income Commentary - 01 Jun 2016

Market Roundup

• Short tenor US Treasuries posted late gains Tuesday, going against stock market losses and on month-end demand after moving largely weaker earlier in the day. The 5T went as high as 1.42% from the prior day’s 1.38% close before falling to close at 1.37%. Meanwhile, longer tenor UST ended unchanged as sentiment remained weak post last Friday’s Yellen’s hawkish comments.
• In macro data releases, consumer spending rose 1.0% in Apr against +0.7% consensus but the prior month’s number was revised down to zero growth versus +0.1% previous estimate. Meanwhile, the Case-Shiller 20-city home price index rose 0.9% mom in Mar, exceeding 0.8% consensus. The rest of the week we have the ISM manufacturing and ADP jobs data leading to the May non-farm payrolls to be released Friday. Consensus for May NFP is 160k or similar the Apr number. The Fed’s latest Beige Book report is due later today.
• With the changed sentiment post remarks by Yellen, we expect UST movement to trek weak. Short term target for the 10-year UST is 1.93% before next resistance at 1.98% which completes a 100% retracement of levels last Oct. Levels a couple of bps below 2.00% seemed to have been major inflection points since end-2014.
• The Ringgit remained weak amid the bullish dollar levels, levels seen above 4.1200 late in the day but it did claw back after hitting 4.1400. Also, the 5-year IRS rose 4bps on the day. With that Malaysian govvies moved on weaker footing with yields slightly higher with hints of position trimming ahead of Friday’s NFP release. However, there was still time for late buying as we heard selected real money players bought on dips. 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 bonds also moved weaker with yields up 2-9bps. 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. Due today is the May CPI, with consensus of +0.27% (+0.07% Apr).
• IDR bond market was little changed in quiet trading and mostly on very short dated bonds up to 3 years (and the 10-year benchmark). MoF held syariah bond auction, and upsized the issuance by IDR4.93 trillion from IDR4.0 trillion target, while incoming bids reached IDR9.6 trillion. On the lookout today is the May CPI data with consensus at +3.30% yoy versus +3.60% Apr.