Monday, November 10, 2008

Bond Market Weekly Commentary - 7 Nov 2008

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After last week’s sell-offs, buying flows were back into the local bond market. The week started on cautious note as players stayed sideline ahead of the announcement of the revised economic forecasts and financial contingency stabilization plan on Tuesday. The Government lowered its GDP forecast for 2008 to 5% from 5.7% while the 2009 growth forecast was also cut to 3.5% from 5.4%. The 2009 deficit number was revised upward to 4.8% of GDP from 3.6%. The market was well bid thereon. Although the higher deficit could result in more bond issuance, thus, increasing the oversupply risk, the market seemed to be more concerned on the slower growth outlook, which increased the probability of a rate cut in the next MPC. Another highlight of the week was on the announcement of the 5-yar MGS auction. The RM3 billion issue was well within market expectation and the good response in the When Issue market has led to aggressive buying across the benchmark curves and ensured a strong finish for the week.

Government Securities

The bond market was buoyed by positive news during the week. The downward revision of 2009 growth and the absence of foreign funds selling were seen as the main factor that led to much flatter curve for the week. Average daily turnover fell to RM1.9 billion compared to RM2.8 billion reported last week. Details of the upcoming 5-year MGS auction were announced on Friday. The When Issued for the RM3 billion issue was last traded at 3.88%, 28bps lower than last week’s level for the existing 5-year benchmark. The bullish sentiment in the WI was followed by aggressive buying from the local players on other benchmarks. The 3-year MN09/11 closed 14bps lower to 3.69%. At the longer end of the curve, both the 10-year MS02/18 and 20-year MX09/28 closed lower by 17bps and 22bps to 4.13% and 4.63% respectively.

In terms of sovereign spreads, the 3/5s narrowed by 14bps to 19bps while the 5/10s widened by 11bps to 25bps. The 10/20s fell by 5bps to 50bps.

The Week Ahead

Increased expectation of a rate cut in the next MPC shall see the bullish sentiment in the bond market to remain. The market will also be focusing on the 5-year MGS auction this week.

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