Sunday, November 16, 2008

Bond Market Weekly Commentary - 14 Nov 2008

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Following last week’s rally, the local bond market continued its sterling performance to close stronger for the week. Gains in US Treasuries and weaker than expected September industrial production data were among the catalysts that led to a much flatter curve for the week. Sentiment was also driven by lower interest rate expectation as speculation of a rate cut in the upcoming MPC intensified.

Out in the news, Industrial Production fell 1.7% in September from a year ago, the first decline in 18 months, and a sharp drop from the 1.2% expansion in August. This was much worse than market expectations for a 0.6% increase. The surprise fall in September IP, especially electronics, suggest a sharp slowdown in 3Q08 GDP growth, likely close to 4-4.5% range or even below, reinforcing the notion that the global recession has finally caught up with Malaysia and increasing the likelihood of a rate cut in the upcoming MPC.

Government Securities

The focus in the MGS market was on the auction of the 5.4 year MN04/14. Prior to the auction, the When Issued was traded in a range of 3.90%-3.76%. The RM3 billion auction received a bid to cover ratio of 1.8 times and was issued at an average rate of 3.751% with the high and low seen at 3.78% and 3.697% respectively. Post auction, the stock was traded lower and close at 3.72%, 16bps lower from last week’s level. In tandem with the good response in the auction, the rest of the curves were traded lower for the week albeit in thin volume. Average daily turnover fell to RM1.3 billion compared to RM1.9 billion reported last week, with interest skewed towards the shorter end of the curve. The 3-year MN09/11 fell 11bps lower to 3.58% while the 10-year MS02/18 closed 3bps lower to 4.10%. The 20-year MS09/28 was lightly traded and closed 5bps lower to 4.58%. In the bills market, the 1-2 month bills fell to a 3-month low of 3.30% on the back of aggressive buying by local interbank players.

In terms of sovereign spreads, the 3/5s narrowed by 5bps to 14bps while the 5/10s widened by 13bps to 38bps. The 10/20s fell by 2bps to 48bps.

The Week Ahead

We expect the market to be traded range bound ahead of the MPC meeting. Focus will also be on the October CPI due to be released on Friday.

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