Smelling More Blood - 23 May 2008

Technorati Tags : Malaysia bond market, weekly commentary

The sell-offs in the bond market continued as crude oil kept hitting another record high. News on the government’s fuel subsidy arrangement to reduce the subsidy bill spooked the market and players were seen reducing their position in anticipation of higher inflation for the year. Although MYR recovered from last week’s sell-offs, offshore activities were confined to the short term bills market and failed to damper the bearish sentiment in the bond market.

Out in the news, CPI inflation jumped to 3.0% in April, up from the 2.8% in February and in line with consensus estimates. This was the fastest increase in 14 months and largely reflects the higher food and energy prices. Although the year-to-date average inflation of 2.7% is still within Bank Negara’s forecast range of 2.5-3.0%, the Domestic and Trade Minister commented that the Government may have to revise its CPI forecast for the year in line with the rising global prices. With global food prices likely to stay elevated in the near term, we expect headline inflation to stay above the 3% mark over the next 3-4 months.

Government Securities

Despite the holiday shortened week, trading volume in the MGS market increased to RM727 million compared to RM692 million registered last week. Higher inflation outlook drove the trading sentiment and yields were generally higher across the benchmarks. The 3-year MN09/11 saw some buying activities at the start of the week in tandem with stronger MYR. The stock was bought to the low of 3.47% before Friday’s sell-offs pushed the closing yield higher to 3.53%. Details of the re-opening of the current 5-year benchmark, MJ07/13 were announced on Friday. The When Issued for the RM3.5 billion issue was sold to the high of 3.70% before easing at 3.68%, 12bps higher than last week’s level. The 10-year MS02/18 closed 12bps higher to 3.95% in heavy trade.

In terms of sovereign spreads, the 3/5s widened by 10bps to 15bps. The 5/10s remained unchanged at 27bps while the 10/20s narrowed by 13bps to 32bps.

The Week Ahead

Focus this week will be on the outcome of the MPC meeting. With inflation presently largely supply side driven, and with downside growth risks in the horizon, we expect Bank Negara will keep policy rates unchanged. However, should stronger evidence of demand side or wage-push inflation pressure start to emerge, or if growth surprises on the upside, a rate hike later in the year cannot be ruled out completely.

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