FW: CIMB Fixed Income Daily - 02 Apr 2018 - US Treasuries closes 1Q18 on firm note / TH market awaits inflation data

 

 

 

CIMB Fixed Income Daily - 02 Apr 2018 - US Treasuries closes 1Q18 on firm note / TH market awaits inflation data

US Treasuries closed 1Q18 on firmer note, despite a hike in the Fed Funds Rate (FFR) by 25bps to 1.25-1.75% range at the 22 Mar FOMC meeting. The hike was widely expected whilst the Fed also hiked up forecast for GDP but maintained its inflation target for 2018-2019. Fed policymakers opined that rise in the labor market and inflation warranted the latest hike but the statement and forecast lean towards a less hawkish view. The dot-plot projections lean just slightly heavier towards 2.25% for 2018 but mainly go into range 2.75-3.25% for 2019. This equates to three hikes in 2019 and this is a slightly steeper trajectory for 2019 versus previous forecasts. Reflecting Fed hike inclinations but inflation still at bay, the UST curve has moved to its flattest since 2007 with the 2x10y spread at sub-50bps against 145bps average in past five years.

We expect risk and headwinds to constrain optimism throughout 2018, providing deterrence to a fast rise in UST yields. These headwinds include: 1) heightened chances of disruptions to global trade flows, brought forth by tariffs; 2) political risks in Europe, including a Brexit stalemate and rise of an anti-EU government in Italy at the same time Germany and France are trying to solidify EU integration; 3) 10y implied volatility is still prevalent and higher versus 4Q17 despite dropping in Mar, whilst short positions may reverse from already intense positioning in Mar; 4) Fed not providing real clarity in its signaling (Powell’s shifting rhetoric); and 5) risk of delay in Trump’s fiscal stimulus, especially in implementation – which is more an administrative issue but there’s also structural risks with the US facing mid-term elections this year. Our expectation for 10T is 3.00% end 2Q18.

In Malaysia, government securities closed last week on mildly weaker note with select benchmark papers up 2-3bps for the week. Earlier in last week there was support for bonds to follow rallies along the US Treasuries and solid movements in MYR against USD (USD/MYR at 3.8625). However, MGS mildly weakened later but we suspect was mostly due to portfolio rebalancing as the market closed out 1Q18.

We think continued upbeat outlook for short tenor bonds in general, in view of firm MYR and low inflation environment bringing Bank Negara Malaysia unlikely to tighten anytime soon, should push for additional flows into the new 3y proxy. We think levels above 3.45% remain an attractive entry point, as we see short-term resistance at 3.40%. Also, that’s it for supply till September. There aren’t any more 3y MGS auction this year, and new issue of 3y GII is scheduled for September 2018 plus a reopening due for December. Our expectation for 3y MGS is 3.45% end 2Q18.

In Thailand, yields edged moderately lower within the front-end and bellies of the curve. Trading activities were thin due to Good Friday holiday. The watch is Thai CPI in Mar. If headline CPI rises and meets the market estimate of 0.97% yoy, growing speculation of MPC hike will underpin front-end yields. Additionally, MoF announced LB326A will become new benchmark 15-year bond.



CIMB Treasury & Markets Research-Fixed Income
Tel: +603 2261 8557 | Fax: +603 2261 8705
www.cimb.com
Find us on Bloomberg at CIMR <Go>
(See attached file: Fixed Income Daily 020418.pdf)

******************************************************************************************************************************************************
Privileged/confidential information may be contained in this message. If this message is received by anyone other than the intended addressee, please return the message to the sender by replying to it and then delete the message from your computer. Unintended recipients are prohibited from taking action on the basis of information in this e-mail. No confidentiality or privilege is waived or lost by CIMB Group including its affiliates (CIMB Group) by any mistransmission of this e-mail. CIMB Group does not accept responsibility or liability for the accuracy or completeness of, or presence of any virus or disabling code in, this e-mail. CIMB Group reserves the right to monitor e-mail communications through its networks (in accordance with applicable laws). Opinions, conclusions, statements and other information in this message that do not relate to the official business of CIMB Group shall be understood as neither given nor endorsed by it.

CIMB Group Sdn Bhd (incorporated in Malaysia, (Company No: 706803-D)). Registered Office: 13th Floor, Menara CIMB, Jalan Stesen Sentral 2, Kuala Lumpur Sentral,, 50470 Kuala Lumpur, Malaysia.

Visit our website at www.cimb.com ******************************************************************************************************************************************************