Snapshot Summary…

Global Rates: US bonds ended last week on a modestly firmer note

MYR Bonds: Malaysian government bond yields fell 4-7 bps across the curve

Global FX: Mixed inflation data pressured the DXY index but supported other currencies

USD/MYR: The falling USD/MYR pair indicates a strong ringgit throughout last week, although it trimmed some losses on Friday

Fixed Income

Global Bonds: US Treasuries ended last week on a modestly firmer note. The 2Y UST fell 4 bps, closing at 4.82%, while the 10Y declined by 8bps to close at 4.42%. Both April's CPI and retail sales growth were lower than expected. Although the PPI reading was stronger than expected, traders noted remarks by NY Fed William and Richmond Fed’s Barkin indicating that overall inflation appeared to be easing. Traders are looking forward to FOMC minutes this week. Eurozone’s 0.6% CPI also contributed to the selling pressure on Treasuries.

Malaysia Government Bonds: In Malaysia, the ringgit government bond market strengthened to follow the sentiment in the global market. The firm's weekly performance saw the 3Y benchmark MGS down by 4 bps w/w, but the 10Y MGS fell by a larger 7 bps w/w, close to the lowest in a month at 3.85%. IRS rates also fell to follow the dip in global rates. Meanwhile, a government auction of the new 20Y MGS (MGS 05/44) at public tender worth MYR3.0 billion and MYR2.0 billion via private placement. The public tender's bid-to-cover (BTC) ratio reached a healthy level of just above 3.0X.

Malaysian Government Bonds View: We see the risk of profit-taking risks after last week's firm performance. However, given the large excess bids and ongoing duration play, the new 20Y MGS could see more post-auction demand. Our view is that there remains an upside of as much as 5 bps for the 20Y MGS in the short-term period even if the 10Y MGS remains at the current level, seeing the tightest 20Y/10Y spread of 20 bps in the past year (Exhibit 2).

Malaysian Corporate Bonds: In the corporate bond market, indicative yields of single-A-rated names declined while higher-grade AAA and AA papers were mixed. Consequently, credit spreads widened last week because MGS yields declined.

Malaysian Corporate Bonds View: We note that valuations on AAA power bonds (such as TNB, TNB Power Gen, Sarawak Energy, and Sarawak Hidro) seem tight already. However, based on our fitted line analysis, select papers, such as long-dated TNB 06/47 and TNB Power Gen 06/42 and 03/43, may tighten further (Exhibit 5).

Forex

DXY Index: Last week, global markets digested US consumer and producer inflation data to gauge the Federal Funds Rate (FFR) direction. The data was mixed, and markets noted that there would not be a rate hike to tame inflation stickiness. Fed Chair Jerome Powell stood firm in his speech, saying the Fed will not raise interest rates for the next move; instead, it is more likely to hold interest rates where they are. As a result, the DXY index dropped to below the 105 level. Furthermore, the underwhelming retail sales data could be the initial hints for cloudy growth prospects in the US economy. We expect the DXY to trade below the 105 level this week, as it will be relatively quiet for the US (except for May Flash PMI by S&P Global). Nonetheless, hawkish sentiments by Fed officials could limit the losses and cause the DXY to rebound after last week’s fall.

Europe: Both the EUR and GBP took advantage of the weaker dollar, and both currencies are currently trading further away from the 1.06-level (for EUR/USD) and 1.23-level (for GBP/USD) they touched in April. We believe it is not impossible for Europe to cut rates earlier than the US as the impact to respective currencies arising from larger rate differentials between the Fed, ECB and BOE would be significant.

Asia: Asian currencies mostly gained against the USD last week. The Aussie and New Zealand dollar posted large gains of 1.3% w/w and 1.9% w/w, respectively, while the Chinese yuan and Japanese yen raked up marginal gains. The SGD, meanwhile, strengthened 0.7%. We think the report showing higher industrial output and China’s government announcing measures to rescue its property sector slump helped drive the yuan and Aussie dollar upwards last week. The measures include setting up a nationwide program to provide USD41.5 billion in loans to fund state purchases of unsold homes.

Malaysia: The falling USD/MYR pair indicates strong ringgit throughout last week, although it trimmed some losses on Friday despite Malaysia’s 1Q GDP growth performing better than expected at 4.2% y/y. Encouraging prospects such as no signal for a US rate hike have helped cushion the pressure on the ringgit against the greenback. We also suspect there is a positive result of MOF-BNM coordinated efforts to prep up the currency. Technical-wise, the pair is currently trading below the 200-day MAVG line of 4.69 – 4.70. This week, Malaysia has a few important data points, including April’s exports and inflation rate.

Source: AmInvest Research - 21 May 2024