Treasury Pulse

  • Business
  • Saturday, 22 Dec 2012

Global forex market

US fiscal cliff came back again to haunt the markets. Republican Speaker Joh Boehner says that the House of Representatives will pass a bill to prevent tax increases on all income below US$1mil. But President Barack Obama indicates that he will veto the bill in the Senate another stalemate that pushed the Dollar Index (which measures the greenback against the currencies of six US trading partners) down 1.9% over the past month the second biggest drop among the G10 currencies.

Defensive positioning in the yen has broadly accelerated with incoming Prime Minister Shinzo Abe openly increasing the pressure on Bank of Japan for greater involvement in markets as a means to combat deflation. Abe's nationalistic views, which further strain Sino-Japanese relation and the widening of the merchandise trade deficit to 983 billion yen in November from 691 billion yen previously are the additional arguments to the shrinking yen safe haven status over time.

Asian ex-Japan currencies were broadly traded in narrow bands, supported by stronger equity inflows especially in the North-East Asian economies. The World Bank in its semi-annual East Asia and Pacific Economic Update expected the region to grow 7.5% this year and to accelerate to 7.9% in 2013 underpinned by rebound in Chinese economy, in turn leading to a firming in key commodity prices. The People's Bank of China (PBoC) announced that they would set their growth target of 7.5% next year while tightening the inflation target from 4% to 3.5%, in an attempt to head off the possibility of runaway prices.

Most Asian central banks continue to take “wait and hold” position on benchmark rates, direct intervention has become a new tool of the day. Hong Kong Monetary Authority injected HK$4.5bil into banking system to prevent currency from advancing. Bangko Sentral ng Pilipinas is preparing to deploy tools to make sure currency movements don't create financial-stability pressures and PBoC with active buying of the US dollar. There are tentative signs that most of Asian central banks are erring to rate cuts in 2013 to keep local currencies stable, to keep consumer prices in check and to support growth in domestic demand. Rate normalisation doesn't seem to be the backbone of policy stance for now.

In South-East Asian markets, issuer default ratings touched a three-year low on rising corporate demand for dollars, foreign funds pull money out from local assets and there are risk of widening current account deficits. Foreign investors sold US$51mil more local stocks and reduced their government debt holdings by US$44mil.

The ringgit was caught in a tight trading band of 3.053 to 3.0613 against the US dolar but traded lower against other major currencies. November's consumer prices of 1.3%, unchanged from the previous two months suggest that Bank Negara will likely keep its overnight policy rate unchanged at 3% for most part of 2013. Meanwhile, Malaysia's leading index mirrored the downward trend of the Organisation for Economic Cooperation and Development composite leading index, extending its weakness to rise marginally by 0.3% in October.

US Treasuries market

Yields on two-, five- and 10-year notes seen settling at 0.27%, 0.75% and 1.75% respectively. Key focus for market players include lingering concerns over an agreement made on the fiscal cliff.

Malaysian bond market

The much anticipated Malaysian Government Securities (MGS)/Government Investment Issues (GII) auction calendar for 2013 was officially released. In the coming 2013, there will be a total of 27 tenders versus 28 tenders held during 2012. The new 20-year GII and 30-year MGS will be making their respective debut in the auction calendar next year. The 20-year GII and the new 30-year MGS are targeted for issuances in September, both during the third quarter.

The new 30-year benchmark MGS will serve as a pricing guidance/benchmark for issuance of longer-dated private debt securities (PDS) issues. With a fiscal deficit of 4% in 2013 translating into RM40bil in ringgit terms and scheduled MGS/GII maturities next year expected at RM50.6bil, estimated gross government issuances will be circa RM90bil. With scheduled high maturities of local govvies next year, net supply would only come to about RM40bil. We opine this would be well absorbed by the domestic financial system, supported by healthy and robust onshore liquidity. On a related note the Government will continue to embark on issuances of Sukuk Perumahan Kerajaan (SPK) in the coming 2013. Similar to MGS and GII, SPK issues will be classified as RENTAS specified securities with the standard tradable lot of RM10mil. Recall, the Government issued RM4.5bil worth of SPK during the second half of this year.

For next year, issuance mix between MGS:GII is estimated at 52%:48%. We believe this is in line with Government's objective of having a more balanced distribution mix as well as promoting issuances of GII as part of the initiative in featuring Malaysia more prominently as an Islamic financial hub.

In the MGS/GII market, RM6.6bil worth of trades transacted at the time of writing with a daily average trading volume of RM1.7bil versus last week's average of RM1.4bil. As per Thursday's close, yields on benchmark MGS closed 1-2 bps lower with the three-, five-, and seven-year benchmarks at 3.09%, 3.25% and 3.47% respectively. The 10- and 20-year benchmarks stood unchanged at a respective 3.51% and 3.89% while the 15-year ended 2 bps higher at 3.71%.

In the PDS market, a total of RM3.4bil worth of trades were seen transacted with 48% coming from the GG/AAA, 51% from the AA segment and the remainder from the single A segment. For the week, daily average trade volume was RM855mil, a tad lower than the RM899mil average seen in the prior trading week.

In the GG/AAA segment, the NBAD 12/27 was actively traded with volume of RM244mil last done at 4.65%. Other notable trades included the Khazanah 8/19 on which trades amounting to RM200mil were concluded at a higher yield of 3.77%.

In the AA rated segment, trading volume was spread across a number of names. RM227mil of Sabah Credit papers maturing 20172019 changed hands. We also saw the Noble 10/15s being traded noticeably higher in price terms with yields easing to 4.09%, with RM140mil trades done.

The ringgit (MYR) interest rate swap (IRS) market

For the week, the MYRIRS curve steepened 1-5 bps albeit thin volume. Lacking fresh local leads, the market took lead from the US markets, focusing on the development in the US fiscal cliff. Expect market to remain quiet with the new year around the corner.

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