Business

Saturday March 28, 2009

Treasury Pulse


Malaysian Bond Market

THE MGS market started the week strong after the change in MGS auction calendar that shifted the supply pipeline towards the shorter-end of the curve. The receding supply concern on the long-end, coupled with the attractive valuation led to significant flattening of the yield curve. Among the benchmarks, 5 and 10-year MGSs benefited the most as their yields dropped 14 and 28 bps the day after the change in auction calendar.

Nevertheless, the announcement of the upcoming tender of 3-year MGS amounting to RM4.5bil took some steam away from the market as it is above the market’s expectation.

Towards the end of the week, BNM published its annual report in which it reiterated the revised GDP forecast of -1% to +1%, and inflation target of 1.5%-2% in 2009.

More importantly, BNM governor Zeti reiterated her previous statement that rate cuts have been front-loaded, and that too low interest is not constructive. Instead, the focus going forward should be ensuring access to credit.

Zeti’s statement is again seen as a hint that room for further rate cuts in the near term could be limited. As a result, MGS market weakened with benchmark yields closing 6-7 bps higher subsequent to the statement.

As we previously mentioned, attractive valuation would underpin the resilience of the long-end with reduced supply pressure. After the correction, 3-year MGS is now trading at more than 80 bps above OPR, which is significantly above historical average. Hence for the short-end, the risk-to-reward ratio is still reasonable despite Zeti’s statement, as further rate cuts still cannot be ruled out given the economic situation.

During Monday to Thursday, a total of RM6.1bil trades were recorded in the MGS/GII market or a daily average of RM1.5bil. MGS ‘8/12 rose 17 bps from the previous Friday to 2.82%, while ‘4/14 fell 10 bps to 3.45%, and ‘7/19 fell 32 bps to 3.70%. No significant trade was recorded on MGS ‘9/28. GII ‘2/14 fell 30 bps to 3.42%.

In the PDS market, trade volume fell to RM557mil or a daily average of RM139mil compared to RM181mil in the previous week. 75% of the trades were contributed by GG and AAA bonds, and 21% by double-A bonds.

Khazanah ‘9/09 fell 1 bp to 1.99%, standing at 83 bps below 3-year MGS, while Khazanah ‘2016 and Prasarana ‘2018 closed at 4.00%, 40 bps higher and 20 bps lower from their respective last done levels, standing at 30 bps above 10-year MGS.

A total of RM145mil trades were recorded on MGS ‘8/09 and ‘8/13 with ‘8/09 closing at 2.45-2.64% and ‘8/13 at 3.80%. Tadamun ‘2014 closed at 3.97% with RM100mil done. Aside in the double-A segment, Hong Leong Financial ‘4/09 fell 110 bps to 2.76% with RM50mil changed hands.

MYR Interest Rate Swap

IRS market started the week in receiving mood after BNM announced a new government bond auction calendar on last Friday evening.

Longer tenor IRS rates gapped down before steadying at a lower level. Rates subsequently picked up during mid week in response to news from US and a rather neutral stance of BNM on interest rate level. The curve ended the week relatively unchanged.

US Treasury Market

The UST market took a bearish turn this week as government bond sales rose to its record high and as traders expect inflation to quicken. Safe-haven demand for UST fell after the Federal Reserve announced plan to help banks dispose off toxic assets.

As at market close on Thursday, yield on 2-year UST rose 4 bps from the previous Friday to 0.91%, 5 and 10-year USTs rose 15 and 11 bps to 1.79% and 2.74% respectively, while 30-year yield fell 1 bp to 3.65%.

Foreign Exchange Market

Forex markets were in a consolidation mode after the excitement of last week as the Dollar regained some ground against the other major currencies. The US Government plans of removing toxic assets from banks books saw a return of risk appetite to the detriment of the USD but it managed to trade mostly off its lows for the week.

Having touched a high of 1.4775, GBP/USD eased lower as players reduced their long positions. Sentiment on the GBP was not helped by the UK Treasury’s auction of 40-year bonds, which failed the first time since 2002.

However, panic and a massive sell off did not ensue as later auctions were fully subscribed. Traders also had reasons to reduce their long EUR/USD positions from highs of 1.3735 as the German IFO disappointed giving the dollar some respite from its weakness.

Elsewhere, AUD/USD held on to its strength to trade in a higher range of 0.69 to 0.71 as commodity prices stabilise and as a proxy trade to entering the relatively illiquid Asian markets as risk appetites returns.

Locally, the MYR continues to benefit from weak Dollar sentiment and improving risk appetite. Although the USD/MYR has largely kept to a 3.6140 – 3.6570 trading range this week, a break below 3.6000 is possible should USD weakness continue.

For enquiries, please contact:
Ng-juan-hui@ambg.com.my,
Melissa-yong@ambg.com.my or
Ooi-liang-wu@ambg.com.my

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