Bond Market Weekly Commentary - 12 Sep 2008

Technorati Tags : Malaysia bond market, 20-year MGS, IPP windfall levy

The bond market had a slow start for the week as players stayed sideline ahead of the 20-year MGS announcement. Trading activities picked up during the middle of the week as local players reacted to the lower than expected issue size of the 20-year MGS. Good flows were seen from insurance players and this has spurred further buying interest across the curves. News that the Government will discontinue the windfall profit levy on independent power producer (IPP) was positively received by market players and this ensured a strong finish for the week.

Out in the news, Industrial Production (IP) slowed to an 11-month low of 1.8% y-o-y in July, slightly lower than consensus estimate at 2.1%. The slowdown in IP signals some degree of moderation in the economy despite the still robust growth in export. With the global economic growth slowdown becoming more pronounced, exports and IP growth would likely soften in the coming months, as the lackluster external demand would probably lead to a cutback in production. However, resilience in domestic demand as indicated by strength in imports would provide the necessary support to offset some negative impact from waning external demand.

Government Securities

In line with the usual auction ritual, turnover in government securities increased to RM1,075 million compared to RM865 million traded last week. Although the market started on a cautious note ahead of the 20-year MGS announcement, buying interest was apparent during the middle of the week as players reacted to the lower than expected issue size for the 20-year MGS. Local flows continued to flock the market and with insurance players joining the buying fray, sentiment continued to remain bullish for the rest of the week. The 3-year MN09/11 dominated the volume for the week and was traded to a low of 3.99% before closing 14bps lower to 4.04%. The 5-year MJ07/13 was lightly traded before closing 19bps lower to 4.15%. Trading in the 10-year MS02/18 was rather choppy and saw an intra week swing of 30bps. The stock was bought to the week’s low of 4.73% before retreating on profit taking activities to close 23bps lower to 4.78%. The When Issued for the new 20-year benchmark MX09/28 was traded in a range of 5.18%-5.24% prior to its auction. The RM2 billon stock was auctioned on Friday with a commendable bid to cover ratio of 1.94 times. The stock was issued at an average rate of 5.248% with the high and low seen at 5.30% and 5.20% respectively. Post auction, the stock was lightly traded and closed at 5.26%. Despite the volatile USD/MYR, short term bills closed relatively unchanged at 3.53%.

In terms of sovereign spreads, the 3/5s and 5/10s narrowed by 5bps and 4bps to 11bps and 63bps respectively.

The Week Ahead

We expect further buying on the 20-year MGS and this could spearhead another bullish run for MGS this week. Nevertheless, players will be a bit cautious ahead of the 3-year MGS auction at the end of the month and this could cap the bull run.

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