CIMB Fixed Income Daily - 27 Jun 2018 - Bonds still pressured by trade concerns; UST rangebound overnight
US Treasuries closed rangebound despite concerns over global trade whilst UST players took on $34b auction of 2y notes. In China earlier on Monday, president Xi sounded tough on trade saying “in the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek. In our culture we punch back”. Atlanta Fed president Raphael Bostic said if trade concerns escalate he may vote against a fourth hike this year.
Tuesday’s Treasury auction garnered bid against cover of 2.73x but which is lower against average of 2.85x in the prior 12 2T auctions. High yield was 2.538% which is higher than 1.879% average past 12 auctions but lower than 2.590% for the 2T auction last month. Indirect bidders which includes foreign central banks ended up with 42.3% of the amount sold but lower than 47.1% average prior 12 auctions. Sale of 5T amounting to $36b is up on Wednesday.
Malaysian government bonds saw heavier trading at RM2.37b volume. However, interest was more towards off-the-runs for a second consecutive day especially from domestic players, for maturities up to 2023. Meanwhile, the central bank released information for upcoming reopening of the 15y GII (GII 06/33) amounting to RM3.5b which we think is slightly on the high side. WI was 4.85/70%. We noted GII 10/35 was traded last at 5.00% which is on the more attractive side.
Current low inflation should add more demand into longer-tenor MGS and GII, in our opinion. Last week, Malaysia 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%.
In Indonesia, with risk-off mode still in play the Rupiah and IndoGBs remained under pressure. Though we noted defensive bids there was also foreign outflows mostly on non-benchmark bonds with maturity 5-10y. Market volume leapt to IDR 29.5 trillion whilst trade concentration stayed at the belly and the tail of the curve.
CIMB Treasury & Markets Research-Fixed Income
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