FW: CIMB Fixed Income Weekly - 23 Oct 2017 - Progress in US tax reforms pressures bonds; positive outlook on Malaysia’s Budget

 

 

US Treasuries

• UST weakened with yields up 9-12bps. The overriding theme at the tail end of last week was the passage of the 2018 budget resolution through the Senate. Yields also rose on hawkish statements by Yellen who said "reasons for series of soft inflation readings … are not immediately clear" but moving to hike too slowly provides its own risk.
• The coming week, we think more progress in the GOP tax proposal (expected to go to the House) will instill more weakness in UST. We bias on a weaker UST and expect 10T to test 2.45% and 2x10 spread >80bps.

Malaysia

• September CPI accelerated to +4.3%, in line with expectation and higher than Aug +3.7% yoy. However, CPI made little impact on bonds as players expect Bank Negara Malaysia to maintain its current monetary stance into the foreseeable future, while core CPI was moderate at +2.4% YoY.
• This week, risk is external especially with uptick in UST yields. We continue to foresee consistent 3x10 and 5x10 spreads in range (>50bps and >30bps respectively).
• We are positive on 2017's fiscal position - our calculations suggest target of 3.0% of GDP deficit is achievable or even surpassable. This is backed by positive macro data, rationalization in government's expenditure, higher oil prices plus steady growth in GST revenues.
• As for 2018, assuming a ceiling 3.0% fiscal deficit target and GDP growth of 4-5%, fiscal deficit financing should be limited to RM40-45 billion. Hence, total MGS+GII offerings in 2018 should also be pretty similar to 2017's (our 2017 target was RM107 billion). Subsequently, supply concerns should be evident next year, but we think will be slanted towards 1H2018. The government may look to another year of front-loading its offerings seeing that a hefty chunk of about RM25.0 billion in MGS and RM7.5 billion GII matures in 1H2018.

Indonesia

• After two recent cuts, the central bank holding its policy rate at 4.25% as expected, meant there was little further catalyst for bonds.
• With sentiment not looking up along the UST market (amid GOP tax reform progress) and no support anticipated from BI policy in the immediate term horizon, we expect upward pressure on yields this week – eyeing 10y bonds around 6.80%.

Best Regards,
CIMB Treasury & Markets Research
Tel: +603 2261 8557
www.cimb.com
Find us on Bloomberg via CIMR <Go>

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