CIMB Fixed Income Daily - 23 Jul 2018 - Foreign and local demand boosts TH bonds; but immediate outlook depends on EM risk appetite and THB movement
US Treasury yields rose 1-6bps along the benchmarks to ensure the market weakened for the week. Trump stating his preference for low interest rates had the opposite effect, with some commentators suggesting the Fed could now dig in their heels to continue to hike rates.
The net selling pressure especially on longer tenors while the shorter ones were steadier steepened the curve with the 2x10 spread at 30bps as we expected with sentiment normalizing after recent trade concerns. The flattish curve is backed Fed's tightening trajectory but amid rising risks to inflation and growth. The recent FOMC minutes had confirmed policymakers' agenda for continued but gradual rate hikes. However, policymakers also signaled they were watching for signs of slack in economic growth, especially as trade concerns have accelerated. Players also heard points from the Fed's semiannual monetary policy report, in which it signaled no need to speed up pace of rate hikes after inflation hits 2.0%. The Fed's forecast range for PCE inflation is 2.0-2.1% in 2018, 2.0-2.2% 2019 and 2.1-2.2% 2020. And latest Fed's Beige Book indicated 10 out of 12 districts reported moderate to modest growth with manufacturers informing concerns against trade tariffs.
IndoGBs were traded weaker with USD/IDR through to 14500 though there was local demand to provide support especially on 5y and 10y benchmark bear 7.77% and 7.86%, respectively. There was also some support amid thin benchmark supply. Yields were up 2-8bps 5-20y tenors.
Thai govvies rose Friday with yields correcting lower 1-3bps in a bull-flattening move. Foreign demand for LB316A checked the yield lower 2-3bps and other long-ends with similar tenors ‑ LB366A, LB383A, and LB396A ‑ followed through with yields 2-3bps down. Local players looked to buy short-ends aging less than 1 year as they needed to park their money after BoT187A matured on 20 Jul. Therefore, CBs were very well bid and the auction of 14d CB received good demand at 1.88 bid cover and tighter as well as lower range of 1.14%-1.15%. Demand on Friday was also temporarily due to the seasonal impact of matured BOT187A. We view appetite for Thai bond will remain low at this moment due to EM risk-off backdrop and weaker Baht outlook.
Ringgit government bonds moved steady with demand concentrated on a couple of GII papers maturing 2027-2028. GII 07/27 was spotted 6bps lower at 4.22% whilst GII 10/28 shed 1bp to 4.20%. We noted since recently that GIIs (and non-benchmark MGS papers) had been in demand. We think demand from recent rally in benchmark MGS is being felt in the GII segment (and non-benchmark MGS segment) especially as there's also a lack of new government guaranteed papers to feed the demand for yield pickup.
CIMB Treasury & Markets Research-Fixed Income
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