Bond Market Weekly Commentary - 04 July 2008

Technorati Tags : Malaysia bond market, inflation and growth

The bond market closed mixed for the week in thin volume. The week started with continued sell down in bonds as players reacted negatively to the latest political saga. The market recovered during the middle of the week as aggressive short covering activities pulled yields lower across the benchmark stocks. However, lack of customer flows made the recovery unsustainable and bonds were under further selling pressure once the short-squeeze of securities have been filled. The week ended with little activities as players chose to remain sidelined ahead of the 10-year auction. Despite the sell down in bonds, the short term bills market was very well supported as investors switched to shorter duration asset in this uncertain environment.

Out in the news, May export growth came in at 22.9%, almost double the market expectations of 12.5%, and the fastest since April 2004. The strong performance in May exports was largely due to the surge in commodity prices, especially petroleum and palm oil. Despite some slowdown in domestic demand, the reportedly impressive export growth figures seem to suggest that the balance of risk is shifting towards inflation for now.

Government Securities

The MGS market remained volatile last week with the bearish mood still clouding overall sentiment. The aggressive short covering in the 3-year and 5-year benchmarks was seen as the savior that capped the sell down in bonds last week. The 3-year MN09/11 was sold to the high of 4.26% before the short-squeeze pulled the yield to a low of 3.96 on Wednesday. The sell down continued during the latter part of the week and the stock closed 9bps higher to 4.19%. Likewise, the similar short covering in the 5-year MJ07/13 saw the stock bought to a low of 4.03% before closing 7bps lower to 4.15%. Trading remained light at the longer end of the curve. The 10-year MS02/18 closed 2bps higher to 4.87% whilst the 20-year MX05/27 ended the week at 5.8%, 2bps lower than last week’s closing. In the bills market, strong demand by both local and offshore players saw the bills with maturities less than 6-month ended the week lower at 3.30%.

In terms of sovereign spreads, the 3/5s narrowed by 16bps to 4bps. The 5/10s added 9bps to 72bps while the 10/20s narrowed by 4bps to 21bps.

The Week Ahead

Focus this week will be on the announcement of the 10-year MGS auction. We expect sentiment to remain bearish against the backdrop of such uncertainty.

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