FW: CIMB Fixed Income Daily - 06 Jun 2018 - TH bonds gain on risk-on sentiment

 

 

CIMB Fixed Income Daily - 06 Jun 2018 - TH bonds gain on risk-on sentiment 

 

US Treasuries posted gains amid weakness in Italian bonds due to current political worries but the gains were pared amid continued macro data releases. The ISM non-manufacturing index rose to reading of 58.6 for the month of May against 57.7 consensus and prior month’s 56.8. Short term risks include next week’s FOMC meeting with 82.0% probability of a hike in FFR to 1.75-2.00% based on future trading. Also next is ECB policy meeting with policymakers reportedly will discuss winding down their asset purchases program.

 

Risk-on sentiment underpinned gains in Thai stocks and bonds. Thai govvies yields shifted lower with best performers the intermediates to back-ends as they fell 3-6bps on Tuesday. The auction of 3m, 6m, and 1y BoT bonds received firm demand, resultantly average yields for 3m and 6m central bank bills (CB) were traded lower at 1.3208% and 1.4934%, respectively compared with their recent 2018 highs at 1.413% and 1.518% in May. Furthermore, the auction of 1y BoT bonds received solid demand at 4.28x bid-cover as average yield increased to attractive buy levels at 1.6099% from last auctioned 1.5102% on 8 May. Current bond sentiment is likely to benefit the auction of LB366A on Wednesday with last bidding at 3.21%.

 

In Jakarta, bonds were traded lower on auction day and higher US Treasury yields. Some position trimming was also seen ahead of next week's Hari Raya Idul Fitri break. Meanwhile on the auction, the government targeted to issue IDR10t and saw incoming bids at IDR29.3t and upsized to IDR11.7t. Although the 10y auction saw bid-to-cover ratio of 2.72x, it was issued at long tail with cutoff at 7.12% against 7.00% opening.

 

Ringgit government bonds saw mostly thin trading with yields moving mixed. We noted the 10y MGS firm as it held unchanged for the day at 4.18%. To recap, the market has remained cagey as players are still debating policy direction of the new government, and especially how this could affect the sovereign credit. Main concern was fiscal impact from the implementation of the new government’s key election proposals such as the abolishment of GST and re-introduction of fuel subsidies. However, on the last day of May, the new government via MOF Lim Guan Eng came out to share its target numbers. We are positive on the details coming out of the MOF and which should aid sentiment in the Malaysian bond market in the short term horizon. The MOF said the country is on pace to meet the prior targeted 2.8% of GDP fiscal deficit this year.

 

The target deficit in ringgit terms is anticipated to show a small increase to RM40.1b against RM39.8b prior estimate. Based on reports from the MOF press conference, there is expected extra revenue of RM5.4b due to higher oil prices (than estimated in 2018 Budget). MOF also said there’ll be additional RM4.0b revenue from the sales tax and RM5b added revenue from higher GLC dividends. This scenario as presented by MOF supplants our earlier expectation of a conservative baseline scenario which would have been a manageable deficit expansion. Based on 1) implementation of sales and service tax, 2) oil-related revenue above the previous government’s assumption of US$52/bbl in Budget 2018, and 3) cuts at the Prime Minister’s department (could amount to slightly over RM5b as our base case), we felt the impact would have been an additional 0.7% to the fiscal deficit, raising the deficit-to-GDP ratio to as high as 3.5% in 2018 %. Yet, this level still would not exceed the 10y historical range of -6.7% to -3.0%, during which the credit rating was unchanged).

 

Asian dollar bonds moved firm amid improved risk appetite, especially after last week’s firm NFP and relief over the geopolitics and global trade side. Nevertheless, we are not too upbeat on short term outlook. Trade war concerns loom on the horizon. EU and Canada have yet to respond to US’ tariffs on their steel and aluminum exports, while investors are awaiting for the outcome from Commerce Secretary Ross’ trade negotiations with China.

 

CIMB Treasury & Markets Research-Fixed Income

Tel: +603 2261 8557 | Fax: +603 2261 8705 

www.cimb.com

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