FW: CIMB Market Musings - 19 Apr 2018 - 5y MGS auction: Relatively weak auction but short- to medium-term outlook is positive

 

 

CIMB Market Musings - 19 Apr 2018 - 5y MGS auction: Relatively weak auction but short- to medium-term outlook is positive

 

Demand was relatively weaker for the amount under the hammer. The auction of new MGS Apr’23 saw relatively weaker demand with bid-to-cover ratio at 1.563x (versus >2x YTD for RM4b issuances) for the relatively large RM4.0b tender size. Average yield was 3.757% with high at 3.780% and low 3.728%. There was a slight tail towards tender closing but yields were just slightly higher than our earlier estimate within 3.70-75%. WI was heard dealt 3.73% prior the tender close.

 

The amount at a relatively large RM4.0b was initially of some concern, but this is to be less of an issue going forward given the new supply will be the new 5y benchmark. Next reopening of MGS Apr’23 will be more than half a year away in November with a couple of 5y GII offerings in May 2018 and August. Moreover, the RM4.0b amount was not a surprise, because amount outstanding of at least RM4.0b is needed to be eligible for inclusion into major bond indices followed by large global fund managers (particularly Citi’s WGBI).

 

Pent-up demand in coming months for ST bonds after recent surge in yields. At 3.757% for MGS Apr’23 (which has slightly longer maturity than prior benchmark MGS Mar’22) remains fairly priced vis-à-vis the rest of the curve (3x5 spread of 20bps versus 12bps using MGS Mar’22) [Please see yield curve to the right]. However, we note that yields had surged since end-Mar 2018 amid a cautious mood and external headwinds. We think some pent-up demand could come in for shorter bonds in the coming weeks if risks abate, whilst domestic growth remains steady with inflation sputtering of late. Our expectation is for 3y MGS to hover near 3.45% by late 2Q18, which would mean 5y MGS has room to come down (yield-wise) in the same time period as well. If 3x5 spreads stay normalized around 20-25bps then the 5y benchmark may likely move down towards 3.65% (from current 3.76%) in the coming couple of months.

 

CIMB Treasury & Markets Research-Fixed Income
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