Bond Market Weekly Commentary - 20 June 2008

Technorati Tags : Malaysia bond market, inflation and growth

The bond market started with some renewed buying interest following up on Governor’s Zeti dovish comment that growth should taper off in the coming months and the recent price increases are driven by rising production cost rather than demand-pull factors. However, sentiment turned bearish on the news that the Sabah Progressive Party will table a no-confidence vote against the PM. The political uncertainty coupled with higher than expected May CPI saw yields spiked up across the curve. Offshore players were seen unwinding their position in the short-dated bonds while at the longer end of the curve there were just offers without any meaningful bids. The short term bills however were very well supported by the local players. Auctions conducted by the Central Bank received a commendable oversubscription rate and the week ended with most of the bills closing below 3.50%.

Out in the news, May CPI registered a y-o-y increase of 3.80%, higher than market expectation of 3.40%. This was the fastest increase in 22 months and largely reflects the higher food prices. Interestingly, the huge jump in May comes even before the fuel and electricity hike in June and July respectively. With global food and energy prices likely to stay elevated in the near term, we expect headline inflation to stay above the 6% mark over the next 3-4 months.

Government Securities

Trading in the MGS was rather volatile last week. After weeks of sell-offs, the market recovered at the earlier part of the week as rates tumbled 7-9 bps across the benchmark curves. However, the recovery was short-lived as rates retested new highs on the back of the much higher than expected May CPI released on Wednesday. Selling pressure was imminent for the rest of the week amidst thin volume. The average daily trading volume fell to RM800 million compared to RM1.3 billion recorded last week. The 3-year MN09/11 saw some technical buying activities at the start of the week. The stock was bought to the low of 3.95% before closing 1bp higher to 4.06%. The 5-year MJ07/13 was the most active stock last week as players continued to run more short position on the back of the bearish market outlook. The stock was sold to the high of 4.21% before late short covering activities saw the closing yield retraced 4bps lower to 4.11%. Volumes were thin in the 10-year MS02/18 and 20-year MX05/27 that saw both stocks closed 10bps and 5bps higher to 4.60% and 5.05% respectively.

In terms of sovereign spreads, the 3/5s narrowed by 5bps to 5bps. The 5/10s narrowed by 14bps to 49bps while the 10/20s narrowed by 5bps to 45bps.

The Week Ahead

Focus this week will be on the announcement of the Government Investment Issue (GII) as well as the outcome of the MPC meeting. Although the Central Bank seemed to play down any rate hike, we foresee the selling pressure to continue and sentiment will remain bearish in line with higher regional rates.

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