CIMB Daily Fixed Income Commentary - 02 Jun 2016

Market Roundup

• The US Treasuries curve flattened as shorter 2- and 5-year securities weakened ( up 1-2bps) and longer tenor benchmarks shedding 1-3bps. This came as on the back of mixed economic data but sustained fears ahead of this month’s FOMC meeting with rising potential for an interest rate hike.
• The ISM manufacturing index rose to a reading of 51.3 for the month of May, against 50.3 consensus and the previous month’s 50.8 reading. Meanwhile, US construction spending fell 1.8% in the month of Apr against +0.6% consensus and the prior month’s upward revised 1.5% (+0.3% previous estimate).
• The Fed’s latest Beige Book report was released, stating mainly that there was ‘modest economic growth since the last Beige Book report’. Consumer spending was modestly higher but manufacturing activity was mixed across the 12 Fed districts. Employment showed modest growth but tight labor markets were still widely noted in most districts.
• The USD consolidated with the DXY index down to 95.46 (rate of half a percentage point lower) after the release of mixed economic data as markets head closer to the FOMC meeting this month. The only currency still weak against the USD was GBP as the Brexit polling looms also this month. GBP/USD was around 1.4416 this morning against 1.4618 a day ago.
• Malaysian government bonds posted mild gains Wednesday despite the Ringgit seeing weak levels. Yields fell in tandem with declines in IRS rates even as USD/MYR found its way above 4.1500 midday. We expect sustained pressure on MGS going into the FOMC meeting, though a climb IRS rates could exceed upward pressure on bond yields seeing relatively tight bond-swap spreads currently. Short term target for 5x5 swap spread is 23bps with players turning net payers towards the FOMC.
• Thai government bonds posted gains along the front of the curve with yields down 2-3bps. However, longer tenor bonds closed within a tight range. Inflation data for May was released showing 0.46% yoy increase, or exceeding consensus of 0.27% and prior month’s +0.07%. On the other hand, core inflation was slightly below consensus at +0.78% (+0.81% consensus) or similar to 0.78% pace recorded in Apr.
• Indonesia’s government bonds moved sideways in a quiet morning session Wednesday. However, activities picked up in the afternoon session as interest moved in especially into 10- and 20-yearr bonds. The May CPI was announced at 3.33% yoy, or the lowest in six years, setting up the stage for BI to possibly do more monetary easing this year. Market volume decreased to IDR5.4 trillion and dominated by bonds maturing in over 10 years (52%) and bonds maturing between 1 and 5 years (23%).
• Asian dollar credits moved little ahead of incoming US macro data this week including the May non-farm payrolls before heading towards the FOMC meeting mid-month. The iTraxx Asia ex-Japan high grade index moved barely half a basis point wider Tuesday.