FW: CIMB Fixed Income Daily - 30 Apr 2018 - Bonds gain strength; targeting 3x10 MGS bull steepener

 

 

CIMB Fixed Income Daily - 30 Apr 2018 - Bonds gain strength; targeting 3x10 MGS bull steepener

 

US Treasuries strengthened after finding its way up to 3.03% and bargain hunting interest was sparked. The coming will see release of important macroeconomic data; including non-farm payrolls (consensus +195k for April against +103k in March), ISM indices, durable goods and PCE inflation, and FOMC meeting as well. There’s only 34.2% probability imputed by futures trading for a rate hike at this week’s FOMC, but we reckon cautious mood could spur 10T back to above 3.00% quite easily. Still, we think support remains at 3.05%.

 

Last Friday, first reading for 1Q18 GDP was +2.3% qoq, which exceeds 2.0% Bloomberg consensus, but well below +2.9% 4Q17. The GDP price deflator rose 2.0% after it was +2.0 after rising 2.3% in 4Q17.

 

Malaysian Government Securities (MGS) weakened on a weekly basis though there was very strong demand on Friday as US Treasuries saw recovery after rising above the psychological 3.00% level mid-week, which prompted bargain hunting interest. By Friday, the 10y MGS was heard around 4.16% after seeing weekly high of 4.21%. At 4.16% meant the 10y MGS rose by 11bps on a weekly basis and the highest since October.

 

Meantime, the late demand flowed into the auction of the new 10y Islamic GII (Government Investment Issue) (GII maturing October 2028, or GII Oct’28). The RM4.0 billion auction saw incoming bids totalling RM10.8 billion, giving a bid-to-cover ratio of 2.70 times. However, the auction’s average profit rate was 4.34% or much higher than the 4.06% yield at the prior 10y securities auction this year, being the 10y MGS, held in February, and with bid-cover of 2.066 times. The strong auction demand for GII Oct’28 was welcomed news in contrast to only a week before when the auction of new 5y MGS (MGS Apr’23) received weak demand at bid-to-cover ratio of 1.563 times.

 

Our view is that MGS yields should come down further from the elevated highs. The recent surge in yields, and not just in Malaysia but in emerging Asian bond markets as well, came alongside weak US Treasuries and US dollar strength. We expect US Treasuries to hold steady near 3.00% in the short to medium term as higher UST yields than currently should require stronger incoming macro data especially inflation. In fact, weak inflationary outlook is what’s driving a flat US curve right now, the flattest since before the global financial crisis of 2007/2008. Our views on 3y and 10y MGS fair value for 3Q18 are 3.55% and 4.05% respectively (see Fixed Income Navigator report published on 16-Mar-2018). Relative value suggests overweight 3y versus 10y MGS for a bullish steepener, or targeting 3x10 MGS spread of 50bps against 42bps seen late Friday.

 

Thailand bonds moved with US Treasuries sentiment, raised demand for Thai govvies to end high at the last trading day of the week. Thai bond curve was in a bull-flattening mode with outperformed long-ends with bids for LB316A and LB326A, and LB366A down 2-4bps. Next watch is April Thai CPI. If Thai CPI rises tepidly below 1.00% yoy in April, foreign sell-off in Thai bond will slow and cap an up-move in USD/THB. 

 

IndoGBs continued to strengthen Friday on the back of stronger UST. We started seeing some offshore inflows especially for tenors up to 10y. Yields fell 9bps across the curve including the strongest for FR63 by -14bps. Volume decreased to IDR21.3t.

 

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