Bond Market Weekly Commentary - 09 May 2008

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Not much activity was seen at the start of the week as players continued to stay sideline in the absence of any firm conviction on future direction of interest rates. Trading interest slowly picked up during the middle of the week, much due to the buying interest in bills and short dated securities by the offshore investors. Sentiment however changed dramatically on Thursday as USD/MYR was aggressively bought to a high of 3.2350, leading to some unwinding of bond position by the offshore players. The short end of the curve was the hardest hit, with rates on the bills rose up to 15bps higher. The market ended with some technical recovery from the sell offs but volume remained thin, signifying the uncertain outlook to the market.

Exports disappointed in March, following a surprisingly strong performance in the first two months of the year. March export growth came in at 5.3%, significantly lower than market expectations of 10.2%. Import growth slowed sharply to 2.6% from 10.9% in December, disappointing market expectations for 6% growth. Although domestic demand likely remained resilient, the moderation in imports likely reflected a slowdown in imports of intermediate goods used in the production of exports. Given the slowdown in exports and stronger imports, the trade balance shrank to RM7.98bn from RM9.17bn in February. While 1Q08 GDP growth will likely be sustained at above 6% given strong performance in January and February, a slowdown in real GDP growth to below 6% is likely to happen in 2Q08 onwards

Government Securities

Trading volume in the MGS market improved to RM1.1 billion compared to RM724 million registered last week. Activities were confined to the short end of the curve with focus primarily on the 2010-2011 maturities. Offshore interest on the 3-year MN09/11 was apparent at the beginning of the week. The stock was bought to a low of 3.44% before Thursday’s sell-off saw it traded to a 4-month high of 3.50%. Week-on-week, the stock closed unchanged at 3.46%. Muted reaction to the move in FX at the longer end of the curve but dealing prices were skewed lower. The 5-year MJ07/13 closed 3bps lower to 3.50% on the back of some short covering activities while the 10-year MS02/18 was thinly traded and closed unchanged at 3.79%. The 20-year MX05/27 inched 2 bps higher to 4.28%. In the bills market, the weaker MYR saw the 3-month bills traded to a high of 3.46% before late buying interest on Friday pushed the closing level to 3.39%.

In terms of sovereign spreads, the 3/5s narrowed by 3bps to 4bps. The 5/10s widened by 3bps to 29bps whilst the 10/20s added 2bps to 49bps

The Week Ahead

Trading at the short end of the curve will be closely aligned against the spot movement in USD/MYR. Players will trade cautiously on the longer sector of the yield curve in view of the growing concerns over rising regional inflation.

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