The Star Online: Treasury Pulse

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Treasury Pulse

Global Forex Market

THE US dollar rebounded by 0.22% to 96.194 largely due to safe haven flows following escalating US-Iran geopolitical tensions after both Iran President Hassan Rouhani and President Donald Trump have traded insults, with Rouhani suggesting that Trump suffered from a “mental disorder” and Trump once more threatening Iran with “obliteration”.

However, the dollar remained largely muted towards the end of the week as global markets await pivotal trade discussions from the G20 summit. Though remarks from Treasury Secretary Steven Mnuchin raised optimism that some progress on the US-China trade deal was being made, investors remained prudent ahead of G20 meeting.

Nonetheless, economic release for the week were slightly disappointing with (1) the Dallas Fed Manufacturing Index contracted more than expected to -12.1 points in June from -5.3 points in May (cons: 4.8), marking the lowest reading since June 2016; (2) US durable goods order reporting a drop for the second consecutive month to 1.3% month-on-month (m-o-m) in May from 2.8% m-o-m in April (cons: 0.1%); and (3) initial jobless claims rose 227K as of June 22 from 217K in the week prior (cons: 220K).

Brent gained 2.61% closing at US$66.55/barrel owing to rising geopolitical tensions between the US and Iran after Trump imposed new sanctions on the country. Moreover, the rally in crude oil prices was supported by a steep drop in EIA crude oil inventory for the second week in a row, witnessing a plunged by 12.79 million barrels as of June 21 from a fall of 3.11 million barrels in the week prior.

The euro erased its gains made earlier this week, falling by 0.26% to 1.137 due to resurgence in dollar’s strength. Besides, downside pressure on euro was also partly due to growing expectations on ECB cut its benchmark interest rates in September. Meanwhile, economic release for the week includes, (1) Germany IFO Business Climate eased to 97.4 in June from 97.9 in May; (2) Germany GFK Consumer Confidence eased to 9.8 in July from 10.1 in June; and (3) EU Business Confidence slowed down to 0.17 in June compared to 0.30 in May.

Amidst a quiet calendar week, the pound weakened by 0.54% to 1.267 largely due to negative Brexit headlines as Boris Johnson has raised the prospect of a shock by pledging to leave the European Union on 31 October without a transition deal if necessary. Besides, the pound was seen trending lower following reports stating that the Boris Johnson is preparing an emergency budget for no-deal Brexit.

The yen depreciated by 0.46% as some optimism brew on Sino-US trade talk after Mnuchin commented that the trade deal between the United States and China is “about 90%” complete.

Apart from that, the yen was seen weaker after Bank of Japan board member Wakatabe said Bank of Japan will maintain the ultra-easy monetary policy as long as needed to achieve the 2% inflation target. He also stressed that the normalisation of policy is unlikely unless the economy and prices return to a normal state.

In the Asia ex-Japan region, Indian rupee came as the best performer, soared 0.40% to 69.07 partly supported by sustained foreign fund inflows into the equity market, adding US$415mil for the week. Meanwhile, Chinese Yuan remained largely unchanged for the week at 6.877 amid slight optimism on US-China trade talks ahead of G20 meeting. However, the baht came in the worst performer for the week, down 0.37% closing at 30.79 as Bank of Thailand slashed its growth and export forecast for the third time in six months amid keeping its benchmark interest rate at 1.75%.

The ringgit managed to pare some losses over the week as risk sentiment improved slightly ahead of G20 meeting. Meanwhile, the local bourse declined marginally by 0.2% at 1,672.7 points despite recording a net foreign inflow for the week, amounting RM88mil. Nonetheless, the overall headline inflation remained unchanged for the third consecutive month at 0.2% year-on-year (y-o-y) in May (cons: 0.3%) while core inflation eased slightly to 0.4% y-o-y in May from 0.5% y-o-y in April. Thus, the average headline inflation for the first five months remained in a deflationary -0.1% y-o-y, while core inflation was 0.4% y-o-y. By end of the week, the ringgit weakened by 0.08% to 4.144.

US Treasuries (UST) Market

The US treasury curve flattens over the week, with the front end rose 1-2bps while the back end eased by 0-1.5bps. Despite Mnuchin raising optimism that some progress on the US-China trade deal was being made, investors remained prudent ahead of the G20 meeting. Apart from rising geopolitical tensions, the downward pressure on yields partly due to Fed chairman Powell’s dovish speech, mentioning “downside risks to the US economy have increased recently”, reinforcing the case for a rate cut in the coming months but later tempered expectations in the markets for aggressive monetary easing.

As at Friday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 1.76%, 1.76%, 2.00% and 2.51%, respectively.

Malaysian Bond Market

Tracking falling global yields, buying momentum continued in the local govvies market with primary focus towards the back end of the curve. The curve eased averagely at 2.5bps across the curve. Nonetheless, the focus of the week was the reopening of 20-year GII 09/39 on Thursday, which gathered a staggering BTC of 4.27x on top of its RM4.0bil issuance size including RM2.0bil privately placed.

The auction closed with a high/low spread of 0.9bp between 4.079% and 4.070% while averaging at 4.074%. As at Friday noon, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 3.32%, 3.42%, 3.56%, 3.64%, 3.98%, 4.12% and 4.41% respectively.

Flows for local govvies dropped 35.4% to RM17.0bil from last week’s RM26.3bil. Activities in the MGS fell 30% w/w to RM12.1bil from RM17.2bil, recording 71% from the total volume traded. Meanwhile, interest in the GII fell 46% to RM4.6bil from RM8.4bil, taking up 27% of the week flows. In contrast, the PDS market saw a more bullish flow, up by 8% to RM3.8bil from last week’s RM3.6bil with the GG/AAA segment contributed 77%; the AA (21%) and others (2%).

The GG/AAA-rated papers saw DanaInfra Nasional Bhd 2023-2049 tranches topped the list with RM590mil and traded at 3.508%–4.420%. Besides, Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA) IMTN 2024-2039 tranches gathered RM400mil and yields closing between 3.500% and 4.189%. These were followed by Prasarana Malaysia Bhd IMTN 2023-2047 tranches which traded at 3.489%-4.4% with a volume of RM285mil.

Meanwhile on the AA-segment, YTL Corp Bhd the star online MTN 2023-2034 tranches gobbled RM225mil with yields firming between 4.056% and 4.430%. Next is Country Garden Real Estate Sdn Bhd 2022-2023 tranches gathered RM96mil and traded between 6.156% and 6.606%. Last but not least is Southern Power Generation Sdn Bhd 2022-2035 tranches traded at 3.918%–4.669% amounting to RM80mil.

Ringgit Interest Rate Swap (IRS) Market

The IRS curve flattens with 10-year falling 3.5bps over the week while the 5-year rose 1bps. As at Friday’s noon pricing, the 3-month Klibor remained unchanged at 3.46% from the previous week. Elsewhere, the 5-year CDS dropped 2.5% to 55.5bps.

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