FW: CIMB Tactical View - Malaysia Bonds: The Return of Confidence

 

HIGHLIGHTS

• Decline in forecasted MGS+GII supply 2018 versus 2017. Based on targeted 2.8% fiscal deficit of GDP in 2018, deficit financing is expected at RM39.8b in 2018. From the latest data, maturing MGS+GII in 2018 is another hefty RM62.8b. Hence, total MGS+GII offerings in 2018 will be mildly lower (versus 2017's RM107.5b) at RM103b. We are bringing down our projected MGS+GII offering size expectation from RM106.5-107b made after Budget 2018 given switching auctions done on 19 Dec 2017, which saw RM4.0b of maturing 2018 MGS swapped into MGS maturing 2037. This will help in supply absorption in 2018.
• New monies plus reinvestment into MGS+GII. In 2018, the maturities of RM62.8b are expected to be reinvested. Plus, we have compiled data of key fixed income investors and anticipate new monies likely to be allocated by these investors to be invested into government bonds to be at least RM20.5b in 2018. The reinvestment and new monies adds up to RM83.3b and will make the bulk of the genuine demand for the government auctions in 2018.
• Higher yields in 2018. Assuming the Fed maintains its gradual tightening path in 2018, a firm MYR (USD/MYR trading 4.10 in 1Q18), steady demand at 1Q18 auctions, and to reflect one potential OPR hike in 1Q18, we expect the 10y MGS yield to rise slightly to 4.10% in 1Q18; the yield may subsequently decline in 2Q18 as the imputation of the rate hike fades. Meanwhile, post-Bank Negara Malaysia hike in 1Q18 and assuming policymakers curtail their hawkish view, we expect the 3y MGS to hold near 3.45% in 1Q18.
• What to do when volatility hits. Periods of higher volatility, we expect, will come as global markets prepare for Fed rate hikes. Here, jolts in volatility will accompany periods of rising yields and/or rates. We opine this will be opportunities to pick up MGS/GII or receive IRS. In periods of lower volatility, opportunity for profit taking in MGS/GII should present itself, whilst IRS players should take opportunity to pay fixed. In particular, we note that FX volatility has declined and investors will likely have to manage interest rate volatility more keenly by being less aggressive on duration.

Best Regards,
CIMB Treasury & Markets Research-Fixed Income
Tel: +603 2261 8557 | Fax: +603 2261 8705
www.cimb.com
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