Business

Saturday November 7, 2009

Treasury pulse


Malaysian Bond Market

The Reserve Bank of Australia (RBA) governor Glenn Stevens became the first central banker to raise interest rates twice this year. The first increase on Oct 6 saw the overnight-cash-rate target being pushed up by 25 bps from an emergency low of 3.00% to 3.25%. The second hike came in barely less than a month later on Nov 3 with another 25 bps increase to 3.50%.

According to RBA’s latest take on the Australian economy, GDP for 2009 is expected to expand 1.75% before accelerating to 3.25% in 2010 on the back of strong consumer confidence and China’s hunger for its commodity exports. This is in stark contrast to its forecast in August when it predicted that the Australian economy will only manage a half percentage point growth in 2009 and 2.25% in 2010.

Since the global financial meltdown last year, the only other countries to have increased interest rates were Israel and Norway. Central banks in the United States, Britain and Japan on the other hand, have kept their respective policy rates steady at between 0% and 0.25%, 0.5% and 0.1% as their economies continue to grapple with persistent unemployment and weak consumer spending. In fact, the US Federal Reserve restated its intention to keep interest rates “exceptionally low” for “an extended period.”

While the general consensus is that the global economy is still way too fragile for governments to roll back the massive stimulus measures that have been put in place, policy makers have already begun debating about the timing for a reversal. Notwithstanding the commitment to maintain accommodative monetary policy conditions, some like the Bank of Japan are already beginning to withdraw emergency measures such as the purchase of corporate debt.

Despite the growing talk about this part of the world potentially leading the rate-hiking cycle, we do not see Malaysia following suit, not at least until the second half of 2010.

While both the government and the World Bank have forecasted an improved macroeconomic outlook for Malaysia, there remains lingering concerns as to whether the economic rebound is sustainable. Up until September, Malaysia had yet to emerge from its export slump with overseas shipments declining by 24.2% year on year in September compared to a fall of 19.9% in August.

In October, the Government revised its forecast for the economy to contract by a smaller 3% in 2009 before returning to growth of 2%-3% the next year while earlier this week, the World Bank had projected the domestic economy to contract by 2.3% in 2009 before expanding by 4.1% in 2010.

Up to Thursday, RM4.1bil trades were recorded in the MGS/GII market with a daily average of RM1bil. From the previous Friday, the two-year benchmark MGS’2/12 rose 3 bps to 2.81% while the three-year benchmark MGS’8/12 traded flat at 2.94%. Meantime, the five-year benchmark MGS’2/15 moved down 4 bps to 3.85% and the 10-year benchmark MGS’11/19 shed 1 bp to 4.27%, while the 20-year MGS’09/28 closed 6 bps lower at 4.59%.

For this month, the Government will announce two scheduled issuances, namely the five-year benchmark MGS MJ02/15 (re-opening) and the new three-year benchmark MGS (maturing 05/13). The expected issue size is around RM4bil to RM4.5bil each.

Daily average trade volume in the PDS market stood at RM439mil; 64% of the total trades were from the AAA segment, 31% from the double-A segment and 4% from single-A segment.

Within the AAA segment, Rantau tranches maturing in 2011-2015 generated a total of RM235mil trades with yields closing at 2.95%-4.30%. Making its debut was Pengurusan Air SPV 10, 14 and 19, their yields closing at 2.68%, 4.4% and 5.05% respectively.

Buying interest was seen in the double-A segment with YTL Power International (AA1) 13 declining 193 bps to 2.32% with RM105mil done and IJM Corp (AA-) 10 closing 11 bps down to 2.80% and RM50mil changing hands.

MYR Interest Rate Swap (IRS)

MYR IRS rates continued its decline from the recent high at the start of the week and stabilised subsequently. Fluctuation in regional equity markets and worries on the financial sector were at the forefront of the picture. The US Fed statement and rate hike by RBA this week were very much within market expectations and failed to have much impact on the local rates scene. Overall, the yield curve ended the week circa 4-8 bps lower.

US Treasury (UST)

UST yield curve bearish steepened as the Fed committed to keep the key interest rate “exceptionally low” for an extended period, coupled together with strong manufacturing and home sales data. On Thursday closing, the two-year yield dipped 2 bps from the previous Friday to 0.88%, while the five-year yield went up 3 bps to 2.34%. The 10-year yield rose 14 bps to 3.53% and the 30-year yield climbed 17 bps to 4.4%.

Foreign Exchange Market

The USD consolidated against major currencies this week despite comments from major Central Banks highlighting improvement in economic prospects in United States and Europe. Although global risk sentiment is still positive, the USD could hold its strength against major currencies in the short term as the marketplace is generally short of the dollar.

After falling early in the week on risk aversion, the EUR and GBP rallied back above 1.4800 and 1.6600 respectively as market remains optimistic of European growth prospect. The USD/MYR traded within 3.4070 – 3.4345 range this week. With little news on the domestic front influencing the MYR, market is looking towards global growth expectations and/or risk appetite to push the USDMYR out of its recent 3.40 – 3.45 range.

● For enquiries, please contact fu-yew-sun@ambankgroup.com, karen-wan@ambankgroup.com, ng-juan-hui@ambankgroup.com and kuek-wee-yong@ambankgroup.com

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