Bond Market Weekly Commentary - 8 Aug 2008

Technorati Tags : Malaysia bond market, USD/MYR

The bond market was fairly quite for most part of the week and was traded range bound in the absence of any fresh leads. However, sentiment turned bearish during the latter part of the week as players took cue from the weaker MYR and higher swap rates. Offshore investors were seen liquidating their positions in short-term bills. The sell down in the bills spilled over to the bonds as well. The announcement of the RM3.5 billion 5-year new GII issuance was also seen as the contributing factor that led to higher yields for the week.

Out in the news, export growth moderated to 18.4% in June, from 22.9% in May, but in line with market consensus. Likewise, import growth accelerated to 12.1% from 9.4% in May, above market expectations for a 10.3% increase, perhaps hinting at some resilience in domestic demand. Given the strength of exports and weaker imports, the monthly trade balance narrowed to RM12.97bn from a record RM15.6bn in May. Despite the narrowing, this was still the second-highest monthly trade surplus on record.

Government Securities

Trading in the MGS market was rather lackluster with the average daily turnover fell to RM581 million compared to RM889 million registered last week. MGS was traded sideways for most part of the week as players stayed sidelined ahead of the FOMC rate decision on Wednesday. The announcement of the new 5-year GII on Thursday pushed yields higher across the benchmark curves. The When Issued for the stock was traded in a range of 4.29% to 4.24% before settling at 4.27%. The fact that MYR weakened considerably and closed higher at 3.3025 led a massive exodus of offshore investors, particularly in the short-term bills market. The 1-3 month bills closed 23bps higher to 3.50% in heavy trade. Other benchmark curves were also traded higher in tandem with the bills. The 3-year MN09/11 closed 12bps higher to 3.95% whilst the 5-year MJ07/13 added 17bps to close at 4.11%. Trading in the 10-year MS02/18 saw a tug of war between the offshore sellers and local buyers. Strong local support was seen at 4.75% level for most part of the week before late selling pressure on Friday pushed the closing yield higher by 14bps to 4.85%. No trade was reported for the 20-year MX05/27.

In terms of sovereign spreads, the 3/5s widened by 5bps to 16bps whilst the 5/10s narrowed by 3bps to 74bps.

The Week Ahead

The focus this week will be on the 5-year new GII issuance. Sentiment will also be closely aligned to the movement in USD/MYR. We expect MYR to weaken further and the bearish sentiment on bonds to persist for the rest of the week.

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