Monday, December 08, 2008

Bond Market Weekly Commentary - 5 Dec 2008

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The local bond market continued to rally in tandem with heightened expectation of further rate cuts. Yields tumbled in line with the move in US Treasuries at the start of the week. The Government’s decision to cut petrol prices by 10 cents on Tuesday saw further buying in bonds as inflation concerns continued to be alleviated. On Wednesday, the market was buoyed by the larger than expected policy rate cut by the Bank of Thailand and this was followed by the weaker October export data released on Thursday. The market ended on a positive note for the week as players started to price in more rate cuts by the Central Banks during the first quarter of next year.

Out in the news, October exports fell for the first time in 15 months, contracting 2.6% from a year ago, from a 15% expansion in September, sharply disappointing consensus expectations for a 6.6% increase. The surprise contraction in October exports points to a weak start to the fourth quarter and increases the likelihood for further rate cuts in Q1 next year.

Government Securities

The highlight of the week was on the reopening of the new 10-year benchmark MS07/19. The When Issued for the stock was transacted in a range of 3.63 to 3.49%. The RM2.5 billion issue was oversubscribed by 2.19 times and issued at an average rate of 3.481% with the high and low seen at 3.50% and 3.45% respectively. The stock ended the week 18bps lower to 3.42%.

Trading volume in the government securities remained relatively unchanged at RM1.56 billion, with most trades went to short term off benchmark papers as investors sought some yield pick up in those stocks. The rest of the benchmarks rallied for the second consecutive week, albeit in smaller magnitude. The 3-year MN09/11 fell 7bps lower to 3.16% whilst the 5-year MN04/14 dropped 9bps lower to close at 3.28%. The search for duration saw the 20-year MX09/28 closed 22bps lower to 3.89%.

In terms of sovereign spread, the 3/5s and 5/10s spreads narrowed by 2bps and 16bps to 12bps and 14bps respectively while the 10/20s widened by 3bps to 47bps.

The Week Ahead

The bullish sentiment in the market is expected to continue this week. However, market players will be a bit cautious ahead of the release of the MGS auction calendar expected to be out by next week.

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