Bond
Market Watch: Ample Supply, Tepid Sentiment
Malaysia:
Ample supply limits downward shift in curve
Maintain
at neutral. We added a cautious tone last month. MGS yields initially jumped in
July amid concerns over a synchronized hawkish shift by major central banks,
but then recouped some losses in the absence of follow-up support in data and
speeches by central bankers. Domestic macro fundamentals remain supportive. Key
risks in 2H17 include market underestimating US rate hike path, ample supply
(both local govvies and high grades) and a historically more challenging bond
market especially in the fourth quarter. We reiterate our 10y MGS yield
forecast at 4.05% by end-3Q17 and 4.15% by end-4Q17.
China:
Stable and neutral policy tone
Maintain
at mildly negative. Stability will likely remain the overriding policy theme
for at least until the 19th NCCPC meeting in autumn this year. That said,
deleveraging drive should stay and it is highly unlikely for a switch to easing
bias. With 1H17 real GDP growth averaging higher at 6.9% (vs target of ≥ 6.5%
in 2017), there is room to rein in financial risks and leverage, especially at
SOEs in the second half. We maintain our mildly bearish view on the 10y CGB
yield.
Indonesia:
Modest supply risk offset by sound fundamentals
Maintain
at neutral. We expect the 10y IndoGB yield to stay rangebound in the region of
7.00-7.20%. Upcoming domestic data releases include Q217 GDP print (we expect 5.1%
YoY growth) and Q217 current account (we expect a deficit of 1.25% of GDP). A
potential risk is concern over the widening of 2017’s budget deficit because of
tax revenue shortfall as this could result in additional supply, but this is
offset by sound fundamentals and alternatively the government can restrict
spending to cap deficit.
Singapore:
Neutral with a stay of vigilant tone
Neutral
with a stay of vigilant tone. Near term, we expect SGS yields to remain
supported amid broad-based strength in regional currencies against the USD. SGD
short-term funding rates should rangebound. In the medium term, over the next 3
to 6 months, we have a cautious view predicated on our mildly bearish outlook
on US Treasury because of dovish pricing by the current OIS forward curve
relative to Fed guidance.
Thailand:
Rate on hold amid benign inflation
Maintain
at neutral. With benign inflation, the prospects of a BoT rate hike this year
has significantly diminished. We expect the BoT to keep rate on hold for now
amid improving economic growth. Meantime, manageable supply and ample liquidity
conditions will remain supportive of demand for ThaiGBs, but the downside risk
is external upward pressures on US rates that could drive flows away from EM
debt and weaken the THB currency.
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