Smelling The Blood - 16 May 2008

Technorati Tags : Malaysia bond market, weekly commentary

The bond market was under heavy selling pressure throughout last week as offshore investors were seen liquidating their position in tandem with weaker MYR. The bearish sentiment was also underpinned by the heightened concerns over the local inflation outlook in view of the spiraling food prices. Standard and Poor’s Rating Services revised its outlook on Malaysia’s foreign currency sovereign credit rating on Thursday to stable from positive. The revision reflects the uncertainty brought about the drastic change to the political landscape after the recent general election. The market recovered slightly on Friday as local players took cue from the overnight rally in US Treasuries. However, in the absence of any offshore presence, we expect the recovery to be short-lived as inflation risk will continue to drive market sentiment.

Out in the news, industrial production moderated in March, gaining 3%yoy, down from a revised 6.5% in February but lower than consensus estimates (+4.2%). The slowdown in production numbers came on the back of weaker than expected March exports, which more than halved to 5.3% in March, from over 14% in February.

Government Securities

Trading volume in the MGS market dropped to RM692 million compared to RM1.1 billion registered last week. The short end of the curve was under heavy selling pressure as USD/MYR surged to high of 3.2770 on Thursday. The short dated MN04/10 was the hardest hit, rising 15bps to 3.53% in heavy trade. The sell-offs also spilled over to the other part of the curves. The 3-year MN09/11 was traded to a high of 3.54% before some late buying by local institutions saw the stock recovered to 3.51%, still 5bps higher than last week’s closing level. The soon to be re-opened 5-year MJ07/13 rose 6bps to 3.56%. The longer end of the curve was lightly traded as players turned cautious towards the local inflation outlook. The 10-year MS02/18 closed 4bps higher to 3.83% while the 20-year MX05/27 remained unchanged at 4.28%. In the bills market, the weaker MYR saw the bills across all tenors surpassed the 3.50% level.

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

The movement in spot USD/MYR will continue to influence trading sentiment at the short end of the curve. The market will be focusing on April CPI data to be released this Wednesday. We expect the longer end of the curve to be traded sideways ahead of the CPI numbers and the MPC meeting to be held next week.

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