FW: CIMB Fixed Income Daily - 02 Aug 2018 - Fed holds policy rate but lifts growth expectation; ID bonds continue to gain

 

 

US Treasuries ended weak with 10T at 3.00% overnight. This comes alongside FOMC and continued weakness in Japanese government bonds (JGBs) with yields at 18-month high (10y JGB at 0.13%). FOMC left the fed funds rate (FFR) unchanged at 1.75-2.00% range but lifted its view of US economy compared with its view at the Jun FOMC meeting; it said ‘economic activity has been rising at a strong rate’. There’s also supply concerns, the Treasury Department said it will auction $78b in notes and bonds next week in its quarterly refunding, or higher by $5b from last quarter. The $78b will refund $38.2b of privately-held US notes maturing 15 August, and will raise new cash of $39.8b. Pressure on Fed (and UST) had been maintained after US 2Q2018 GDP release late last week at firm annualized +4.1% qoq though lower against +4.2% consensus, whilst the prior quarter’s was upward revised to +2.2% from +2.0% previous estimate.

 

Earlier, BoJ came out dovish. BoJ maintained target of zero for 10y JGBs though widened the allowable range around which yields could move. This explains the JBG weakness as a steeper yield curve is possible (especially as banks would prefer wider spreads to make profit). BoJ also provided forward guidance for rates, saying current low rates will run for ‘and extended period of time’.

 

IndoGBs were dealt firm on Wednesday following the upbeat bond auction and ahead of FOMC meeting. Support was suspected from both locals and foreign names. The 10y FR64 was traded as low as 7.68% as the curve fell 5-7bps. Volume decreased to IDR19.4t whilst trade was concentrated on the belly and tail end of the curve. Indonesia’s CPI rose 0.28% mom in July against +0.24% expectation whilst core inflation was 2.87% yoy against +2.74% expectated. Meantime, Bloomberg reported this week BI governor Perry Warjiyo said the central bank will continue to stabilize the IDR and strengthen its monetary policy mix to ‘improve attractiveness of the local market.

 

In Thailand, CPI remained moderate in July and did not pose threat to Thai govvies. Headline CPI grew 1.46% yoy in July less than the estimate of 1.49% and it dropped 0.05% from previous month owing to disinflation of food prices particularly of meats, poultry, fruits and vegetables. Core CPI was weak at 0.79% yoy in July indicating low demand-pull inflationary pressures. Meantime, energy and related prices of transportation and vehicle operations continued to be key drivers of inflation. Thai govvies curve maintained bull-flattening as offshore buying momentum of LB466A extended on the first day of August and the bidding yield further declined by 3bps leading to gains in the long-ends with yield down 1-2bps for the tenors longer than 17 years. Front-ends were supported by the Baht's appreciation with USD/THB low at 33.12 but mid-ends within 3-6y segment saw profit taking interest that pushed up the yield by 1-2bps.

 

Malaysia’s government bonds continued to rally, and on heavy volume. Leading the activities was GII 10/28 on RM820m flows, shedding 3bps to 4.17%. Also heavily traded was MGS 11/33 on RM500m volume, as it fell 3bps to 4.48%. On top of bargain-hunting interest and continued portfolio realignment (including extending duration), prior day’s dovish BoJ policy meeting outcome had supported regional bonds including Malaysia’s.

CIMB Treasury & Markets Research-Fixed Income
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