Strong Demand for 2y UST New Issue Ahead of FOMC Minutes

22 February 2017

Rates & FX Market Update

Strong Demand for 2y UST New Issue Ahead of FOMC Minutes

Highlights

¨   Global Markets: Yields on USTs climbed higher towards the end of the trading session, returning earlier gains sustained following the release of weaker than expected PMI data. 2y UST yield inched higher overnight to 1.21% (+2bps) despite strong demand for the 2y new issue which garnered a BTC of 2.82x (Jan: 2.68x) amid higher cutoff yield at 1.23% (Jan: 1.21%). Political uncertainty stemming from EU continues to fuel safe haven demand for USTs, limiting upward pressure on UST yields even as Fedspeak continue to signal a likelihood of March FFR hike ahead of FOMC minutes due later today; keep a neutral UST duration stance.

¨   AxJ Markets: Protests in Indonesia, demanding for the Jakarta governor’s arrest ahead of runoff polls, intensified, dampening the allure of IndoGBs and IDR. Yields on IndoGBs surged higher by 2-7bps while IDR depreciated by 0.13% to 13,372 yesterday, with the moderate climb in Indonesia’s CPI also likely to challenge the prospects of further BI easing; we prefer to keep a neutral duration stance on IndoGBs over the medium term.

¨   The pullback in the EURUSD pair was weighed by rising concerns on electoral uncertainty as polls indicated French Presidential Candidate Le Pen leading and Dutch candidate Wilders gaining ground, fuelling concerns of increasing anti-EU sentiment. While EU’s PMI data release reflected strong improvements within the manufacturing and services segment, the political overhang continue to exert bearish pressure on EUR; underperformance in EGBs were skewed towards the peripherals, where we reiterate our preference for the core EGBs over the near term as the tight political race fuels uncertainty.