Sunday, November 02, 2008

Bond Market Weekly Commentary - 31 October 2008

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Despite the dovish MPS last Friday, the bond market was under heavy selling pressure for the week. The weakness in emerging market currencies including MYR was seen as the main factor that led to the outflow of foreign funds from the bond market. The midweek rate cut by the Fed, China, Taiwan, Hong Kong and Korea failed to lift market sentiment and the sell down in bonds continued until the end of the week. Out in the news, the Government announced another cut in fuel prices on Friday, a RM0.15 reduction to RM2.15 per liter. The decision was made in tandem with the recent collapsed in crude oil and this is expected to further ease the inflationary pressure going forward.

Government Securities

Led by foreign funds liquidation in MGS, the market closed weaker for the week. Average daily turnover picked up to RM2.3bn compared to RM2.1 billion reported last week. The highlight of the week was on the auction of the 10-year GII. The RM3.5bn issue was quite well received by the investors, judging by the decent bid to cover ratio of 1.65 times. The stock was issued at an average rate of 4.295% with the high and low seen at a tight range of 4.32% and 4.26% respectively. Post auction, the stock closed a tad higher at 4.29%. The other part of the benchmarks also closed steeper for the week. The 3-year MN09/11 closed 9bps higher to 3.83%. Some forced selling on the 5-year MJ07/13 led the stock to close 33bps higher to 4.16%, although some non-interbank deals were reportedly done at a high of 4.26%. At the longer end of the curve, both the 10-year MS02/18 and 20-year MX09/28 closed higher by 17bps and 20bps to 4.30% and 4.85% respectively.

In terms of sovereign spreads, the 3/5s widened by 24bps to 33bps while the 5/10s narrowed by 16bps to 14bps. The 10/20s increased slightly by 3bps to 55bps.

The Week Ahead

As global central banks are focusing on stimulating the economy, there will be further rate cuts announced in the near term. This could provide an impetus for BNM to do the same in their next MPC on Nov 24. Although there could be further liquidation by foreign funds, the expectation of a rate cut will likely to limit any significant weaknesses in the MGS market.

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