Bond Market Weekly Commentary - 29 Aug 2008

Technorati Tags : Malaysia bond market, budget deficit

Trading interest in the local bond market picked up for the week despite the higher than expected July’s CPI. The dovish MPS following the Central Bank’s decision to maintain the OPR at 3.50% was seen the catalyst for the rally in bonds at the start of the week. With corporate and real money investors joining the buying fray, the market maintained its bullish note for most part of the week. The Permatang Pauh by-election had no impact on the market despite the continued weakness in MYR. The market however, ended the week on a softer note as profit taking activities took place ahead of the 2009 budget tabling on Friday. News that the 2008 budget deficit will hit 4.8% of GDP, much higher than the original deficit plan of 3.1%, saw continued selling pressure on the bonds as players anticipated a larger bond issuance to meet the Government’s financing requirement for the year.

Government Securities

Government securities was actively traded during the eventful week with average daily turnover jumped to RM1.2 billion compared to RM634 million reported last week. The market started on a positive note as players took cue from the dovish MPS that dashed any likelihood of a rate hike for the rest of the year. Short covering activities at the longer end of the curve also contributed to lower yields at the earlier part of the week. However, the market succumbed to late selling pressure on Friday resulting from the higher 2008 budget deficit. The 3-year MN09/11 closed 7bps higher to 3.92% whilst the 5-year MJ07/13 was lightly traded before closing 4bps lower to 3.96%. Trading in the 10-year MS02/18 was rather volatile for the week. After being bought to the low of 4.68%, the stock was aggressively sold towards the end of the week and close 1bp higher to 4.82%. Some odd lot of the 20-year MX05/27 was traded at 5.05%, 3bps lower than last week’s level.

In terms of sovereign spreads, the 3/5s narrowed by 7bps to 4bps whilst the 5/10s widened by 5bps to 86bps. The 10/20s meanwhile shed 4bps lower to 23bps.

The Week Ahead

We expect the selling pressure to continue as players started to digest the impact of higher budget deficit on the bond market. The market will also be cautious ahead of the announcement of the 20-year MGS issuance in September.

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