Executive Summary

Performance set to improve in 2H2024-1H2025. We project that UST yields will gradually decline in the coming quarters. We acknowledge that this month started on a firm note for Treasuries, anchored by weak data, including the July NFP and ISM vis-à-vis consensus. After an anticipated market correction, we believe the UST market will essentially repeat its historical tendency to lead the movement in FFR as bond players price in the Fed’s policy easing. We anticipate the 10Y UST at 3.95% by 3Q2024, 3.90% by 4Q2024 and 3.85% by the end 1H2025.

As a variable for our UST yield projections into the coming quarters, our base case is conservatively one (25 bps) Fed rate cut this year. We further pencil in the assumption of two more rate cuts in 1H2025. In addition, we assume the continued lessening of US inflationary pressures. Our assumptions heed the June FOMC projections of headline PCE and core PCE inflation of 2.6% and 2.8% and testing 2.3% by 2025, and for our UST model, we tag in US CPI below 3% in 2025.

For 2H2024 and 1H2025, we foresee a modestly stronger MGS performance. The basis for our outlook is the following factors: 1) declining global rates, 2) yields already pricing in higher OPR, 3) Yield levels expected to remain attractive vis-à-vis the US, 4) modestly favourable MGS and GII supply outlook, and 5) onshore demand expected to be supportive. We think there is a stable outlook on BNM with a potential hike in 2025, but we view yields as already pricing in a higher OPR. For example, the 3Y MGS at 3.40-3.50% is relatively wide. We think the MGS spread across the curve will show modest steepening led by a slightly larger dip in shorter tenor yields in the next few quarters vis-à-vis longer tenors.

We see a modestly favourable MGS and GII supply outlook for the rest of 2024 and in 2025, where we foresee 2H2024 at smaller gross and net issuances. After an estimated MYR94.5 billion gross issuance in 1H2024, 2H2024 gross issuance should come up to MYR85.5 billion (2H2023 MYR89.5 billion). In terms of net issuances, 2H2024 should see a much smaller MYR32.0 billion (2H2023 MYR53.5 billion).

Lastly, we expect that in 2H2024, credit spreads will see a modest widening but remain tight from a historical perspective. We base our outlook for modest widening in coming quarters on the following factors: 1) Improvements in credit health alongside firm GDP growth, 2) Lagging numbers in gross and net PDS issuances for 2024, and 3) Readjustments ahead of possible tightening of monetary policy.

Source: AmInvest Research - 16 Aug 2024