FW: CIMB Fixed Income Daily - 14 May 2018 - Short-term lookout in MY; Bank Negara Malaysia holds rate

 

 

US Treasuries ended flat Friday. Sentiment continued to be supported after Thursday’s lower-than-expected CPI, though Friday saw import prices rose 0.3% mom in April against 0.5% mom consensus and prior month’s decline of 0.2%. The day before the April CPI came out at 0.2% mom against +0.3% consensus but higher than deflationary number of -0.1% the month before. Players were also watching developments in Italy, where far-right 5 Star moved closer to form a coalition government.

 

Thailand government bonds extended gains Friday led by outperformance in mid-ends with yields declining 3-4bps within 3-8y segments. Most EM stocks, bonds, and currencies rose on Friday as sentiment improved. KRW led gains in Asians currencies since Thursday after Trump agreed to meet with North Korean leader on 12 June. Furthermore, UST yield softened in bull-flattening curve with yield declining in the belly and the back of the curve after US CPI printed below the forecast in April.

 

IndoGBs rallied on Friday as well, on the back of weaker USD and lower US Treasury yields. Offshore inflows were seen with USD/IDR below 14,000. Sentiment was also fueled by expectation BI may hike at the coming week's meeting. Bond yield curve went down 20-30 bps across. Market volume decreased to IDR 16.5 trillion whilst trade concentration shifted to the tail end of the curve.

 

A historic event occurred in Malaysia as incumbent governing alliance of past 61 years was elected and replaced by fresh alliance of parties led by former premier Mahathir. In the MYR bond market, we face rise of a volatile short-term reaction in view of the historic event. Most eyes will be on foreign interest. However, to put in perspective, we know majority of the speculative elements we’ve seen in the past are not in the domestic market anymore. Most foreign ownership in the MYR government bonds, we know based on data from MOF, is held by longer term investors including fund/asset managers (36% out of total foreign holdings), central banks/supranational and sovereign institutions (30%), and pension funds (17%). Though foreign holdings in MGS+GII is in excess of 30% of the total outstanding, the majority remains long term investors.

 

Thus the bulk of foreign interest should remain onshore over the short term. Hence, even though we do expect short term outflow, the extent of the funds moving out may be limited. The smooth transition of power so far and formation of ‘elder’ advisors to the government ought to aid sentiment. For the medium and longer term, much depends on the structural change in government, specifically smoothness of the transition at the executive level, and incoming policies. More specifically, we need to look at fiscal policy, as this will translate directly to creditworthiness of the sovereign. The new government will need to balance between the expenditure and revenue side of things. On the revenue side, the major impact will be scrapping of GST. This places dent of >RM40b in revenue. To cover this some of options include the old sales and services tax. The new government could also review the GST to mimic a more progressive tax structure to its liking. Other points with regards to revenue may also help – sourcing from petroleum-related taxes, or raising the corporate tax. On the expenditure side, we anticipate development expenditure to be relooked at. On the operating side there are options as well, including reviews of emoluments. Hence, there remain options for the new government to ultimately produce a controlled fiscal plan.

 

We are eyeing support for 10y MGS at ascending big figure yield levels for now; eyeing 4.20% short term, then onwards to test 4.30% breaking of which could see 4.40% in the medium term. The higher yields represent good buying opportunities.

 

Elsewhere, Bank Negara Malaysia held its latest monetary policy committee (MPC) meeting on Thursday despite being a public holiday. The committee held the OPR at 3.25% as expected and sounded only mildly hawkish after already raising the rate from 3.00% at the January 2018 MPC.

 

Reopening of GII Aug’25 will be held today. Amount is RM3.0b which meets our expectation and is not a large amount. Thus we expect decent to firm demand for this auction. GII Aug’25 was last dealt at 4.13% but levels at auction could rise vis-à-vis MGS Sep’25 last at 4.21%.

CIMB Treasury & Markets Research-Fixed Income
Tel: +603 2261 8557 | Fax: +603 2261 8705
www.cimb.com
Find us on Bloomberg at CIMR <Go>

 

******************************************************************************************************************************************************
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 ******************************************************************************************************************************************************