Bond Market Weekly Commentary - 5 Sep 2008

Technorati Tags : Malaysia bond market, bond bloodbath

The selling pressure resulting from the higher than expected budget deficit continued this week as players reacted to the revised auction calendar issued by BNM on Monday. Increasing concerns towards the oversupply factor saw yield curve continue to steepen for the week. The fact that MYR continued to weaken against the greenback and closed at the year’s high of 3.4600 also contributed to the bearish sentiment in the market.

Out in the news, export growth accelerated to 25.4% in July, from a revised 18.6% in June, significantly above consensus expectations of 14.5% and accelerating from 20.8% in 2Q08. Despite the slowdown in global economy and falling commodity prices, July trade surplus surged to the second highest on record. While some slowdown is inevitable given the global slowdown in 2H08, robust imports and a large trade surplus suggest a degree of resilience in economic growth.

Government Securities

Turnover in government securities fell to RM865 compared to RM1.2 billion traded last week as players stayed sideline and remained cautious ahead of the announcement of the 20-year MGS auction. The market started the week on a weaker note in reaction to the revised auction calendar issued by BNM and never recovered from that. There will be 6 more public issues for the rest of the year, an additional 2 issuances compared to the original calendar. In addition to that, there will also be 5 private placements to be conducted until year end. Selling pressure was imminent throughout the week as players continued to shed their position in anticipation of higher bond issuance for the rest of the year. The 3-year MN09/11 was the most active stock for the week, rising 26bps higher to close at 4.18% whilst the 5-year MJ07/13 was lightly traded before closing 34bps higher to 4.34%. The 10-year MS02/18 breached the psychological 5.00% mark and closed 19bps higher to 5.01%. No trade was reported on the 20-year MX05/27. In the bills market, offshore players were seen liquidating their position in tandem with weaker MYR. The 1-3 month bills closed 5bps higher to 3.55% in heavy trade.

In terms of sovereign spreads, the 3/5s widened by 12bps to 16bps whilst the 5/10s narrowed by 19bps to 67bps.

The Week Ahead

We expect sentiment to remain bearish ahead of the 20-year MGS auction. Market direction will also be largely influenced by the movement in spot USD/MYR.

Writer's view

The bond market is totally in deep shit now. Although BNM will hold the OPR at 3.50% for the rest of the year, the market can't stomach a total of RM6 billion worth of issuance in the space of 3 months. Expect the bloodbath to continue especially after the annoucement of 20-year MGS tomorrow. A simple direction towards trading....short whatever u can short.

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