Global Markets Research - Weekly Highlights (HLB)

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1. February 5 , 2018 Global Markets Research Fixed Income Fixed Income Daily Market Snapshot US Treasuries US T T e nure C lo s ing ( %) 2-yr UST 2.14 -2 5-yr UST 2.59 2 10-yr UST 2.84 5 30-yr UST 3.09 6 C hg ( bps ) M GS G II* T e nure C lo s ing ( %) 3-yr 3.37 2 3.54 -3 5-yr 3.60 -3 3.88 -1 7-yr 3.89 -7 4.08 0 10-yr 3.96 6 4.16 -1 C hg ( bps ) C lo s ing ( %) C hg ( bps ) 15-yr 4.40 0 4.53 0 20-yr 4.60 -1 4.78 0 30-yr 4.85 -1 4.96 1 * M arket indicative levels  US Treasuries ended weak across most tenures with yields higher by 2-6bps across 5s to 30s tenures save for the 2Y. Analysts have been eyeing a recent increase in US bond yields following strong jobs data last Friday. The curve steepened against the 2Y; which is sensitive to Fed policy interest rate expectations. The much-watched 10Y rose 5bps higher at 2.84%. The speed with which yields are spiking may send shudders through the market for now with March and May rate hikes on the cards. Upcoming data include Markit US PMI and Trade Balance figures. MGS/GII M Y R IR S Le v e ls IR S C lo s ing ( %) C hg ( bps ) 1-yr 3.78 1 3-yr 3.84 0 5-yr 3.92 2 7-yr 4.03 2 10-yr 4.14 1 So urce : B lo o mberg  Local Govvies saw volume traded improve to RM3.21b with interest seen in belly of the curve i.e. off-the-runs 18-21’s together with 5Y benchmarks MGS and GII. Yields were mostly mixed between -7 to +6bps. Both the widely-watched benchmark 7Y MGS 9/24 and 10Y MGS 11/27 closed mixed at 3.89% and 3.96% respectively compared to previous-done levels. BNM statement quoted by the Edge says that the recent OPR hike shouldn’t be construed as tightening of monetary policy with the phase of rate normalization to fall into place worldwide eventually. Investors and market players may be cautious and possibly track developments in the US Treasury market for now. Upcoming Government Bond Tenders 7.5Y new issue of GII 8/25 totaling RM3.0b + RM1.0b (Private Placement) on Tues, 6th Feb PDS/Sukuk  Unlike Govvies; interest waned in the secondary market for Corporate Bonds with total volume of only RM100m and some interest seen in the AAA and AA-space. PLUS 25 rose 8bps to end at 4.50% compared to previous-done levels whereas AArated YTL Power 10/21 and BGSM 6/24 closed unchanged at 4.48% and 4.70% respectively. Expect only selective investor interest on the back of rising UST yields. 1
2. FIXED INCOME February 5 , 2018 Daily Trades : Government Bonds Securities Closing Vol YTM (RM mil) MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS MGS GII GII GII GII GII 02/18 09/18 03/19 07/19 10/19 11/19 03/20 07/20 10/20 02/21 07/21 09/21 11/21 03/22 08/22 09/22 03/23 08/23 07/24 09/24 09/25 04/26 11/26 03/27 05/27 11/27 04/30 06/31 04/32 04/33 05/35 04/37 09/43 03/46 04/20 04/22 07/23 07/27 05/47 4.152 3.018 3.141 3.310 3.287 3.341 3.349 4.449 3.442 3.371 3.481 3.591 3.492 3.603 3.745 3.742 3.799 3.842 3.917 3.919 3.970 4.116 4.045 4.151 4.197 3.886 4.369 4.442 4.457 4.403 4.561 4.603 4.819 4.847 3.536 3.876 3.996 4.164 4.960 Previous YTM 80 148 206 4 50 182 101 13 92 41 30 60 174 338 99 125 22 15 13 98 48 14 9 2 1 208 2 11 3 138 40 400 8 40 26 312 14 10 40 3214 3.252 3.226 3.362 3.249 3.293 3.285 3.330 3.381 3.383 3.353 3.497 3.607 3.498 3.637 3.735 3.712 3.777 3.860 3.897 3.929 3.999 4.087 4.008 4.158 4.154 3.961 4.407 4.441 4.482 4.403 4.591 4.615 4.846 4.867 3.569 3.882 4.035 4.174 4.947 Previous Trade Date (dd/mm/yyyy) 30/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 26/01/2018 29/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 26/01/2018 29/01/2018 29/01/2018 30/01/2018 30/01/2018 30/01/2018 29/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 29/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 24/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 30/01/2018 23/01/2018 Chg (bp) 90 -21 -22 6 -1 6 2 107 6 2 -2 -2 -1 -3 1 3 2 -2 2 -1 -3 3 4 -1 4 -7 -4 0 -3 0 -3 -1 -3 -2 -3 -1 -4 -1 1 Daily Trades: PDS / Sukuk Securities Impian Ekspresi Sdn Berhad Projek Lebuhraya Usahasama Berhad YTL Power International Berhad CIMB Bank Berhad BGSM Management Sdn Berhad 11/20 01/25 10/21 10/23 06/24 *spread against nearest indicative tenured MGS (Source : BPAM) 2 Rating Closing YTM Vol (RM mil) Previous YTM AAA AAA AA1 AA1 AA3 4.721 4.497 4.478 4.256 4.697 20 20 10 30 20 100 4.779 4.414 4.479 4.229 4.701 Previous Trade Date (dd/mm/yyyy) 21/04/2017 02/11/2017 29/01/2018 07/12/2017 22/01/2018 Chg (bp) -6 8 0 3 0 Spread Against MGS* 133 57 99 46 90
3. FIXED INCOME February 5 , 2018 Market/Corporate News: What’s Brewing FINANCIAL market volatility is expected to increase significantly as US financing requirements exert further upward pressure on bond yields. There is even warning of a possible crash. “The pressure on the bond market has already caused yields of 10-year US Treasuries to surpass its resistance of 2.6%.“In the last fiscal year, the US deficit had already reached US$666bil, its largest since 2013. The Trump administration is reported to be selling US$66bil worth of long-term debt in the first quarter to fill the financing gap.“This will further exert upward pressure on bond yields,” said Nor Zahidi Alias, chief economist, Malaysian Rating Corp. Bond yields and prices move in opposite directions; rising yields indicate negative market conditions. Stock markets plunged and bond yields soared last Friday after US data, showing the strongest annual wage growth since 2009, rattled investors who fear that rising inflation would lead to more rate hikes than expected, according to Reuters. “Trump’s military spending and tax cuts, plus the Fed ending the last bits of quantitative easing (QE), all point to the fact that Treasury issuances are going to be huge. “This is particularly at a time when a big buyer, that is, the Fed, is withdrawing from the market. So interest rates just have to climb. “If wage pressures climb, like I think they will, the Fed will have its hands tied with monetary easing,” said Pong. The US Fed kept interest rates unchanged last Wednesday but said inflation would likely rise this year, said Reuters. “The implications of a bigger budget deficit and debt are rising longterm rates and price inflation. US infrastructure spending, if implemented as planned, will boost economic growth via the multiplier effect. “Sustained US growth bodes well for the global economy, and Asian exports. The trillion dollar infrastructure spending will put pressure on the US budget deficit and national debt,” said Lee Heng Guie, executive director, Socio Economic Research Centre. Hot on the heels of tax cuts, Trump had unveiled a US$1.5 trillion infrastructure spending. “These are intended as positive moves but the funding for the huge deficit that it implies, has not been quite thought out. Spiking Treasury yields is evidence that money does not grow on trees. “Central banks will probably be forced back into QE; they are effectively locked into a game of QE infinity. Each time they attempt to exit QE, a crisis breaks out,” said Pong. “I worry about a spell of very high and spiralling inflation. With QE, there is no limit to the amount of US dollars and other reserve currencies (that can be minted) to buy up physical resources especially commodities. “By pouring more and more cheaply minted money into exploration and production of commodities, we have deferred the arrival of the day of reckoning,” said Pong. Huge new commodities supplies will keep commodities prices low; this capacity to produce consumer goods will mean a hugely competitive industry producing goods at low prices so that low interest rates can be justified. “It is a truly vicious cycle,” said Pong. Legendary investor Jim Rogers had predicted, in his interview with “The Bottom Line” in the middle of last year, that a market crash that is going to be “the worst in your lifetime,” will likely happen this year. “In 2008, we had a problem because of debt... that debt is nothing compared to what’s happening now. In 2008, the Chinese had a lot of money saved for a rainy day. “It started raining. They started spending the money. Now, even the Chinese have debt, and the debt is much higher. “The Fed... the balance sheet is up over five times since 2008,” Rogers was quoted as saying. If this drop (the Dow fell 666 points last Friday) is (the crash Rogers was predicting), it is only the first instalment. That is why we should be afraid... very afraid,” said Pong. There are concerns on the effects of the US tax cuts which is reminiscent of the Ronald Reagan era in the 1980s. This “supply side” policy is based on the argument that a tax cut will provide enough stimulus where revenue growth will eventually increase and make up for the initial loss. “Reagan tried this but the budget deficit swelled to 5% of gross domestic product in 1983, from 2% in 1980. “The pressure on the deficit lead to a surge in rates and yields on US Treasuries spiked by 400 basis points in the late 1980s,” said Zahidi. ( Source: The Edge ) As FX traders look ahead to Malaysia’s upcoming general election, they might want to look back at past polls for trading cues. In four out of the last five polls going back to 1986, the ringgit has strengthened in the six-month periods leading up to the vote (omitting years when it was pegged to the U.S. dollar). How might the Malaysian currency trade heading into the general election this year, due by August? If the past is a guide, keep an eye on oil. The price of oil was also rising in the run-up to the polls -- suggesting the ringgit may have been reflecting that strength. Oil constitutes a declining, yet still significant, share of Malaysia’s exports and government revenues. So it’s reasonable to expect the ringgit to appreciate when oil is rising. 3
4. FIXED INCOME February 5 , 2018 Trading in Oil, Ringgit. Six Months Before Elections- aside from higher oil prices at the moment, the ringgit has other factors in its favor heading into this year’s general election: * The previous multi-year sell-off in the ringgit increases its upside potential. * Capital inflows are supported by Bank Negara Malaysia’s January rate hike and the prospect of more tightening to come. * Exports more broadly are supported by sustained momentum in global demand. Hence, Oil Up, Ringgit Up, Same Government Most Times. Malaysia’s economy is less dependent on oil than it has been in the past and the ringgit is more independent. Indeed, the ringgit languished in 2016 -- when oil prices rallied 200%. Even so, it might not hurt the incumbent’s chances this year if oil continues to climb a bit longer. (Source: The Edge) Rating Actions Issuer PDS Description Nil Nil Source: RAM Ratings; MARC 4 Rating/Outlook Action Nil Nil
5. FIXED INCOME February 5 , 2018 Hong Leong Bank Berhad Fixed Income & Economic Research, Global Markets Level 8, Menara Hong Leong 6, Jalan Damanlela Bukit Damansara 50490 Kuala Lumpur Tel: 603-2081 1221 Fax: 603-2081 8936 Email: DISCLAIMER This report is for information purposes only and does not take into account the investment objectives, financial situation or particular needs of any particular recipient. The information contained herein does not constitute the provision of investment advice and is not intended as an offer or solicitation with respect to the purchase or sale of any of the financial instruments mentioned in this report and will not form the basis or a part of any contract or commitment whatsoever. The information contained in this publication is derived from data obtained from sources believed by Hong Leong Bank Berhad (“HLBB”) to be reliable and in good faith, but no warranties or guarantees, representations are made by HLBB with regard to the accuracy, completeness or suitability of the data. Any opinions expressed reflect the current judgment of the authors of the report and do not necessarily represent the opinion of HLBB or any of the companies within the Hong Leong Bank Group (“HLB Group”). The opinions reflected herein may change without notice and the opinions do not necessarily correspond to the opinions of HLBB. HLBB does not have an obligation to amend, modify or update this report or to otherwise notify a reader or recipient thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. HLB Group, their directors, employees and representatives do not have any responsibility or liability to any person or recipient (whether by reason of negligence, negligent misstatement or otherwise) arising from any statement, opinion or information, expressed or implied, arising out of, contained in or derived from or omission from the reports or matter. HLBB may, to the extent permitted by law, buy, sell or hold significantly long or short positions; act as investment and/or commercial bankers; be represented on the board of the issuers; and/or engage in ‘market making’ of securities mentioned herein. The past performance of financial instruments is not indicative of future results. Whilst every effort is made to ensure that statements of facts made in this report are accurate, all estimates, projections, forecasts, expressions of opinion and other subjective judgments contained in this report are based on assumptions considered to be reasonable as of the date of the document in which they are contained and must not be construed as a representation that the matters referred to therein will occur. Any projections or forecasts mentioned in this report may not be achieved due to multiple risk factors including without limitation market volatility, sector volatility, corporate actions, the unavailability of complete and accurate information. No assurance can be given that any opinion described herein would yield favorable investment results. Recipients who are not market professional or institutional investor customer of HLBB should seek the advice of their independent financial advisor prior to taking any investment decision based on the recommendations in this report. HLBB may provide hyperlinks to websites of entities mentioned in this report, however the inclusion of a link does not imply that HLBB endorses, recommends or approves any material on the linked page or accessible from it. Such linked websites are accessed entirely at your own risk. HLBB does not accept responsibility whatsoever for any such material, nor for consequences of its use. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for the use of the addressees only and may not be redistributed, reproduced or passed on to any other person or published, in part or in whole, for any purpose, without the prior, written consent of HLBB. The manner of distributing this report may be restricted by law or regulation in certain countries. Persons into whose possession this report may come are required to inform themselves about and to observe such restrictions. By accepting this report, a recipient hereof agrees to be bound by the foregoing limitations. 5