Business

Saturday September 26, 2009

Treasury Pulse


Malaysian Bond Market

THE decision by the Federal Open Market Committee (FOMC) to keep the federal funds rate in the targeted range of 0%-0.25% was widely anticipated. The FOMC cited the need to keep rates at “exceptionally low levels for an extended period of time” even as it acknowledged the pickup in economic activity. It also said that the economic environment is likely to remain weak for a while, reinforcing views that the Fed will press on with its quantitative easing programme. This includes the planned purchase of US$1.25 trillion in agency mortgage-backed securities and US$200bil in agency debt right up until the end of first quarter 2010 to prop up the housing and credit markets.

While the FOMC has reiterated that inflation remains subdued and hence, negates the need for a rate hike anytime soon, a return to economic growth would inevitably fuel concerns that the Fed may have to start increasing the benchmark lending rate.

In Asia, central banks are already beginning to adopt a more hawkish stance on monetary tightening in the wake of sturdier economic conditions. Those in Australia and even South Korea have already started to guide on exit strategies by embracing the possibility of interest rate hikes should conditions prove conducive. In fact, the Asian Development Bank (ADB) recently revised upwards its growth forecast for developing Asia (ex-Japan) to 3.9% in 2009 and 6.4% in 2010 (from 3.4% and 6.0% respectively), opining that the region will lead global economic recovery.

In Malaysia, the Government is expected to revise its growth forecast for Malaysia during Budget 2010.

Hence, for bond investors, interest rate risk should remain benign in the near-term as BNM is unlikely to hike the OPR any time soon. However, once economic recovery is sustained into 2010, the pressure for BNM to raise interest rates will emerge.

Investors should pay attention to emerging signs of interest rate risk particularly as the market tends to start pricing in rate hikes in advance. It is therefore important that investors do not over-extend on duration. At the same time, by extending duration, investors can take advantage of the steep curve currently for significant yield pickup. Therefore we think that a neutral duration stance (of around 5 years) is the most optimum to drive portfolio performance while the roll-down into 2010 (i.e. portfolio duration becomes 4 years) helps to contain duration risk.

That said, we continue to prefer “credit” over “interest rate” plays to drive portfolio performance. Selective investments into creditworthy AA-and-below PDS with compelling yields remain our core strategy to enhance portfolio returns amid the low interest rate regime. While “safe haven” GG and AAA papers still offer reasonable levels of enhancement, investors should nonetheless note their higher correlation to MGS and interest rate movements.

Up to Thursday, daily trade volume in the MGS/GII market averaged out to RM1.8b, slightly higher than the previous week. About 58% (RM2.1b) of trades done were contributed by MGS’10/09. Dealing interest was subdued for benchmark papers with only the 3-year MGS’8/12 and 5-year MGS’2/15 traded during the week, closing 1 bp lower to 2.88% and 1 bp up to 3.74%, respectively.

Daily average trade volume in the PDS market rose to RM337m. Yields closed mostly lower across the board. 61% of the trades were contributed by the GG and AAA segment, 37% by the double-A segment, and 2% by the single-A segment.

In the AAA segment, Prasarana ’09/29 made its debut by contributing 47% of total PDS trades recorded to close at 5.03%. MISC and Rantau tranches maturing in 2010-2013 generated a cumulative volume of RM40m. In the double-A segment, YTLPI ’04/13 (AA1) was the most actively traded with RM137m done to close flat at 4.20% while RM80m of Public Bank ’05/13 (AA1) changed hands to close at 1 bp higher at 4.59%.

MYR Interest Rate Swap (IRS)

MYR IRS rates traded within a tight range during the short week. On Wednesday, BNM reiterated that the current key interest rate at 2.00% remains “appropriate” and expects positive growth in fourth quarter.

BNM stance is very much within market expectation. Overall, the yield curve ended the week relatively unchanged.

US Treasury (UST)

UST yields dipped lower during the week given the weaker-than-expected US housing data.

As at market close on Thursday, yield on the 2-year UST shed 5 bps from the previous Friday to 0.94%, the 5-year yield down 8 bps to 2.37%, the 10-year yield dipped 9 bps to 3.38% and the 30-year yield eased 4 bps to 4.17%.

Foreign Exchange Market

The USD ended the week on the weak side against major currencies as global economic recovery spreads. However, market focus is now firmly on the G20 meeting which could have a bearing on currency direction, in particular the USD’s.

With some governments mulling over removing financial support from the market, we could get a temporary correction of the weak USD trend of the past months.

EUR/USD set a new high of 1.4842 but it has since fallen to 1.46s on faltering momentum. Meanwhile the GBP fell below 1.6000 on Bank of England governor Mervin King’s dovish comments and growing perception that UK favoured a weaker Pound to sustain its recovery.

As the USD remains oversold in the global FX market, further corrective retracement of the EUR and GBP over the near-term is expected.

USD/MYR traded in a lower range of 3.4610 – 3.4840 in a holiday-shortened week. USD short covering across the board as the 3rd quarter ends could see further upside test towards 3.5000 with 3.4600 serving as a base.

For enquiries, please contact:


fu-yew-sun@ambankgroup.com


karen-wan@ambankgroup.com


ng-juan-hui@ambankgroup.com


kuek-wee-yong@ambankgroup.com

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