My Daily Blog: Bond Market Weekly Commentary

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Trading in the bond market was largely influenced by the movement in USD/MYR which reached a 10-year low of 3.1310 on Wednesday. Offshore players were seen extending the maturities of their holdings by switching from bills to short-dated bonds, fuelling a mini rally during the first half of the week. The lower than expected March CPI also propped bond prices higher. Sentiment however turned bearish during the later part of the week. Worries about rising price pressure, increased bets that the Federal Reserve is approaching the end of its rate-cutting cycle and optimism that liquidity-pumping by global central banks has pulled credit markets away from the worst of the crisis were among the contributing factors that led to weaker market by the end of the week.

CPI edged slightly higher to 2.8% in March, up from the 2.7% in February but lower than consensus estimates of 3.0%. This was the fastest increase in 13 months. For the first 3 months of 2008, CPI averaged 2.6% versus the same period a year ago. Brewing inflationary pressures, especially from food have continued to intensify, and will likely raise headline inflation further over the next few months. However, Governor Zeti reiterated that adjustments to interest rates are not the solution to stem inflation.

Government Securities

MGS trading volume improved to RM2.1 billion against RM1.1 billion recorded last week. Week-on-week saw the benchmark curves steepened as players turned cautious towards rising global price pressure. The 3-year MN09/11 was bought to a low of 3.41%, much due to MYR appreciation before profit taking activities saw the stock closed 4bps higher to 3.49%. The 5-year MJ07/13 was the most volatile stock of the week. Aggressive short covering activities during the most part of the week saw the stock traded to its 3-months low at 3.39%. However, the sell-offs on Friday pushed the closing yield higher by 1bp to 3.52%. The 10-year MS02/18 closed 3bps higher to 3.79% in light trade. In the bills market, the buying fervor from offshore players continued as USD/MYR kept on breaking its record low. The 3-month and 6-month bills closed lower at 3.15% and 3.17% respectively.

In terms of sovereign spreads, the 3/5s narrowed by 3bps to 3bps. The 5/10s added 2bps to 27bps whilst the 10/20s fell 1bp to 46bps

The Week Ahead

The market will be focusing on the MPC meeting to be held at month end. Although BNM is expected to maintain the OPR at 3.50%, continued concern on rising global food prices could see the bearish mood to persist for the time being. Nevertheless, any upward correction in USD/MYR could be viewed as an opportunity for offshore players to re-enter and this would be positive for the bond market.

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