FW: Bond Market Watch_20170829

 

Bond Market Watch: Curve lower on geopolitical tension

 

Malaysia: Supported by both domestic and foreign demand

Maintain at neutral. MGS markets outperformed our expectation as the worsening of North Korea tension after the missile launch over Japan sparked demand for safe-haven assets, causing compression in developed-market bond yields with spillover effect to regional markets. Unless a diplomatic solution is achieved, our 10y MGS yield target of 4.05% by end-3Q17 seems unattainable. But we reiterate our medium-term target of 4.15% by end-4Q17.

 

China: Under pressure on liquidity squeeze

Maintain at mildly bearish. We think the tightness in interbank liquidity to continue as we near the September MPA amid large NCD maturity. Both 3M SHIBOR and 3M NCD rates have been on the rise since around mid/late July, a sign of seasonal demand for cash or prefunding for September's maturity. But we don’t expect a disruptive increase in short-term rates as upward pressure may be cushioned by the PBOC’s net injections of liquidity through various tools. Key policy theme likely remains “stable and neutral” monetary stance amid continued deleveraging drive, which we think allows for a gradual increase in market-based rates. We maintain our mildly bearish view on CGB.

 

Indonesia: Curve bull-steepened after unexpected rate cut

Maintain at neutral. Indonesia bond market should remain well bid on the back of its high-yielding appeal and sound fundamentals with inflation well contained, still robust economic growth and a narrowing current account deficit/GDP ratio. Potential catalyst is market playing up the expectation of another potential interest rate cut if inflation softens further from the 3.9% July YoY print, but our economic research expect no change until end-2017.

 

Singapore: Neutral on expectation of easing funding tightness

Maintain at neutral. Near term, headline risks such as the North Korea tension may continue to dominate, which is effectively putting a cap on developed-market yields. Having underperformed the UST in August, we don’t expect such a trend to extend into September for SGS. We expect funding tightness to ease slightly going forward. Our economics team expect the MAS to shift to a “mild appreciation bias” in October, probably still a non-consensus call, if materializes should support the SGD outlook and temper upward pressure on SGD funding rates.

 

Thailand: Stable conditions

Maintain at neutral. Near term conditions for ThaiGBs remain stable with moderate supply in September, strong external reserves (July: USD190.4b) supporting the Thai Baht and low inflation and healthy economic growth keeping policy rate on hold. We now expect policy rate to remain at 1.50% until year-end. A key risk remains the pace of monetary tightening in DMs where upward pressure in US rates could drive outflows from EM debt.