US Treasuries strengthened amid continued safe haven demand. News reported Chinese president Xi remarking to a group of chiefs of multinational companies that China will step up fight against Trump’s anti-trade rhetoric. Meantime, US Treasury secretary said there’s planned restrictions on foreign investment in US technology industries and this will not be limited to Chinese interest. In US macroeconomic data release, new homes sales rose by 6.7% mom in May against +0.8% consensus.
Thai government bonds mostly saw firmer yields despite net selling pressure from foreign players. Thai BMA reported foreign investors sold net amount of Bt4.35b of THB-denominated bonds on Monday. Hence, we think select domestic players supported the market on the day.
Coming back from the Hari Raya holiday, IndoGB market saw weakness amid USD strength and the offerish situation owed mainly to offshore participants. Data show foreigners’ bond holdings saw decline of IDR1.84t week-on-week to 21 Jun. Meantime, yields rose 25bps on average.
Today MoF will be holding its usual sukuk auction with IDR4t amount target. Also, BI will have its policy meeting scheduled for Thursday, with Bloomberg consensus showing another hike rate That being said, expect weaker market this especially if USD continues to strengthen.
Benchmark Malaysian government bonds saw little movement, despite the weak MYR, but we noted stronger flows along off-the-runs as domestic players especially bought papers with attractive spreads above the benchmarks. MGS 05/35 fell 4bps on the day to 4.91% whilst the 10y MGS (MGS 06/28) shed 1bp to 4.20%.
We think risk aversion away from the EM could find some exhaustion if it hasn’t already. We think a continuous pricing of monetary policy and pre-emptive US rates communication will moderate this so-called EM strife. The Fed has moved to signal four hikes in 2018 but ECB has turned its back on its hawkish signal as we mentioned. Meantime, the BoJ has maintained its policy rate and QE program. As such, we expect EM resilience to accompany in the medium-term though USD could maintain some strength. We expect Malaysian bonds to be supported in the coming week. We further opine that macro conditions remain supportive for bonds, as GDP growth is anticipated above 5% and inflation still benign – which in turn indicates stable interest rate movement in Malaysia well into 2019.
Malaysia had reported headline inflation nudging up to 1.8% yoy in May (CIMB: +2.0% yoy, Bloomberg consensus: +1.8% yoy, Apr: +1.4% yoy), amid the low base in fuel inflation. In comparison, core inflation was unchanged at +1.5% yoy in May. Our CIMB economist says to account for downward consumer price adjustments resulting from the GST cut, the reintroduction of the sales and service tax (SST) in Sep, and curbed spillover effect from global oil prices to retail RON95 petrol and diesel prices, she is revising down CIMB’s 2018 headline inflation forecast from 2.6% to 1.3%, which is well below Bank Negara Malaysia’s policy target of 2-3%.
CIMB Treasury & Markets Research-Fixed Income
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