Monday, October 27, 2008

Bond Market Weekly Commentary - 24 October 2008

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The bond market was fairly quiet at the start of the week as players stayed sideline ahead of the policy speech by the Finance Minister on measures to address the economic slowdown. Apart from some initiative to boost foreign investment and the local stock market, there were no other comprehensive measures announced, hence the bond market remained lackluster. Buying interest picked up during the middle of the week in reaction to the dovish statement made by the Domestic Trade and Consumer Affairs Minister on the lower inflation outlook for September. Offshore players were seen buying the short term government securities as speculation on interest rate cut intensified. Local players however, were seen reducing positions on Thursday ahead of the announcement of the auction details on the 10-year GII. Coupled with some profit taking activities at the end of the week, bonds closed slightly weaker although the downtrend in yields remained intact.

Out in the news, CPI eased to 8.2% in September, in tandem with the recent reduction in fuel prices and in line with market consensus. The much awaited rate decision in the MPC meeting saw the OPR being maintained at 3.50%. The accompanying MPS however emphasized on the slower growth outlook and continued moderation in inflation, thus signaling a rate cut may come sooner than expected.

Government Securities

The MGS market closed weaker for the week as technical correction took place after 3 weeks of consecutive gains. Focus of the week was on the announcement of the 10-year GII. The RM3.5 billion issue was within market expectation. Nevertheless, the longer duration of the bond caused some selling pressure on the other part of the curve and saw the MGS market ended softer for the week. Average daily turnover increased slightly to RM2.1 billion compared to RM2 billion reported last week. The 3-year MN09/11 closed 8bps higher to 3.74% whilst the 5-year MJ07/13 added 5bps to close higher at 3.83%. Significant reduction in the trading volume for the 10-year MS02/18 saw the stock traded sideways before closing 5bps higher to 4.13%. Some odd lot of non-interbank trade was reportedly done for the 20-year MS09/28 at 4.65%, 5bps lower than last week’s level.

In terms of sovereign spreads, the 3/5s narrowed by 3bps to 9bps while the 5/10s remained unchanged at 30bps. The 10/20s gapped down by 10bps to 52bps.

The Week Ahead

This week’s focus will be on the auction of the 10-year GII. In view of the dovish MPS released last Friday, we expect the auction to be well received by investors. After last week’s correction, buying interest shall revisit the market and the bullish sentiment shall remain until the next MPC in November.

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