Monday, October 13, 2008

Bond Market Weekly Commentary - 10 October 2008

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The bond market continued to be buoyed by safe haven flows as equity market tumbled around the world. The coordinated rate cuts by global central banks on Wednesday was taken positively by the market as more countries have shifted their focus from inflation to growth and further rate cuts are expected to be exercised in the near future. Although BNM is not expected to cut OPR in the near term, lower interest rate expectation saw a much lower and flatter yield curve for the week.

Out in the news, Industrial Production growth moderated to a 12-month low of 0.9% y-o-y in August, lower than consensus estimate of a 1.9% growth. This is in line with the moderating growth seen in August exports, which slowed by more than half (+10.6%) versus July (+25.3%) and seems to confirm the early signs that the effects of the global slowdown are finally beginning to hit the local economy.

Government Securities

The bullish sentiment in the bond market continued for the week as investors turned to safe haven on the back of global financial turmoil. The midweek rate cut by the US and European central banks triggered some knee jerk buying on MGS and led to stronger closing for the week. The significant drop in crude oil was also seen as the catalyst to the rally as the market prepares for another cut in fuel prices this month. Average daily turnover increased to RM1.9 billion compared to RM900 million reported last week. The 3-year MN09/11 garnered the most market share and touched a yield low of 3.65% before closing at 3.76%, about 3bps lower from last Friday. Trading remained minimal on the 5-year MJ07/13 which closed 9bps lower to 3.83%. The 10-year MS02/18 was the biggest gainer for the week, dropping 29 lower to 4.19% while the 20-year MS09/28 shed 19bps to close lower at 4.80%.

In terms of sovereign spreads, the 3/5s narrowed by 6bps to 4bps. The 5/10s was also lower by 20bps to 36bps while the 10/20s widened by 10bps to 61bps.

The Week Ahead

We expect some correction in the bond market after the strong run for the past couple of weeks. Nevertheless, the bullish trend should remain intact given the prospect of more rate cuts by the global central banks.

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