Bond Market Weekly Commentary - 25 July 2008
Sentiment in the bond market was mainly driven by market expectation of CPI and MPC rate decision. The week started on a weaker note as players stayed sidelined ahead of the Jun CPI data. Bonds were well offered and traded 10-20bps higher as speculation on higher than expected CPI intensified. On Wednesday, Malaysia CPI hit its 27-year high at 7.7% in June, far exceeding market expectation of 6.8%. This largely reflected the fuel price hikes in early June, but there were also signs of inflation pressures spreading to other categories of the CPI basket. Despite the much higher than expected CPI, the market rallied the next day on the back of lower regional rates. As market turned its attention to the MPC, bonds recovered further grounds as players started to discount any possibility of a rate hike, given some dovish remark on inflation outlook made by the Second Finance Minister.
On Friday, the MPC decided to maintain the OPR at 3.50% despite the recent spike in CPI. In the accompanying MPS, BNM also raised its full-year forecast for average inflation to 5.5-6.0 percent from 4.2 percent previously.
The MGS market was lightly traded ahead of the release of Jun CPI and MPC rate decision. The average daily turnover remained relatively unchanged at RM754 million. The benchmark curves were much higher during the first part of the week before some aggressive buying took place on Thursday. The 3-year MN09/11 was traded from a high of 4.07% to a low of 3.73% before closing 1bp higher to 3.83%. Liquidity in the 5-year MJ07/13 remained lackluster with the stock traded in a range of 4.08% - 3.92% and closed at 4.05%, 8bps higher than last week’s level. The 10-year MS02/18 continued to dominate the market share and saw some furious price action for the week. The stock was given to a high of 5.02% pre CPI release but was aggressively bought back to the low of 4.73% on Thursday before ending the week 3bps higher to 4.82%. No trade was reported for the 20-year MX05/27. The bills market closed relatively unchanged with the 1-3 month bills traded in a range of 3.34% - 3.26%.
In terms of sovereign spreads, the 3/5s widened by 7bps to 22bps and the 5/10s narrowed by 5bps to 77bps.
The Week Ahead
Given the MPC decision to maintain the OPR at 3.50% despite the recent spike in CPI, we expect USD/MYR to trade higher. This could lead to foreign investors liquidating their bond positions and would negatively impact the bond market. However, some bargain hunting by the local players and real money investors could provide the support to market
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