Bond Market Weekly Commentary - 19 Sep 2008

Malaysia bond market, fuel price cut, global credit crisis

The credit crisis in the global financial market led by the bankruptcy of Lehman and the bail out of AIG has shifted the investment focus towards the safe haven assets as equity market tumbled significantly during the week. The bond market rallied at the start of the week in tandem with the huge gain in US Treasuries. Speculation on Fed rate cut also contributed to sizeable buying flows from interbank and corporate players. The Fed however maintained the benchmark rate at its current level and technical correction took place on Wednesday. Coupled with weaker MYR and uncertain political development, bonds erased earlier gains and looked softer by midweek. Nevertheless, selective buying by underinvested funds saw the market closed slightly stronger as at the end of the week.

Government Securities

The volatile week saw turnover in government securities increased to RM1.6 billion compared to RM1.08 billion traded last week. In tandem with US Treasuries, the market started on solid ground and was well supported by good buying flows. The significant downward move in yields also triggered aggressive short coverings at the long end of the curve and yields continued to plunge by midweek. Although the market corrected on the back of FOMC inaction on rates, it has certainly recovered from the post budget slump due to over supply concerns. The significant fall in oil and commodity prices has eased the global inflationary pressure and despite the still high local headline inflation, the pressure is clearly lower with potential cuts in pump prices in the coming months. The 3-year MN09/11 dominated the volume for the week and was traded to a low of 3.87% on Tuesday before closing 1bp lower to 4.03%. Liquidity in the 5-year MJ07/13 was much improved and the stock closed 5bps lower to 4.10%. At the longer end of the curve, the 10-year MS02/18 closed 7bps lower to 4.71% after touching its 3-month low of 4.56% on Tuesday whilst the 20-year MX09/28 received good demand post auction and closed 6bps lower to 5.20%. The short term bills closed unchanged at 3.53%.

In terms of sovereign spreads, the curve continue to flatten with the 3/5s, 5/10s and 10/20s gapped down by 4bps, 2bps and 1bp respectively.

The Week Ahead

Focus this week will be on the announcement of the 3-year MGS re-opening and players are expecting an issue size between MYR3 – 3.5 billion. Bearing any surprises in the issue size, we expect buying interest to reemerge after the recent correction.

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