The Perspective:

US Treasury Market

UST prices fell for the second consecutive week as equity markets rallied on solid earnings reports and investors took profits ahead of the sale of USD115b government debts this week. The decline in prices nevertheless was cushioned by Federal Reserve Chairman Ben Bernanke’s comments that the economy is too weak for the central bank to revise its monetary easing policy anytime soon. On a WoW basis, bond 2- and 10-year benchmark securities increased 1bp to close at 1.00% and 3.66% while the 30-year benchmark security closed unchanged at 4.54%.

On the economic front, the leading economic indicators rose 0.7% in June following an upwardly revised gain of 1.3% in the prior month, indicating that recession may already have bottomed out and that a recovery is likely to occur in the second half of 2009.Economist had expected the index to increase by 0.5%. Meanwhile, the US housing market continues to show improvement. The June existing home sale increased 3.6% to an annual rate of 4.89m, higher than market consensus’ 4.84m. Furthermore, the June’s inventory of unsold homes eased to a 9.4 months supply from 9.8 months in May. While the sales are gradually increasing, economist indicated that a balanced market has about 7 months of supply.

In another report, the number of Americans filing for jobless claims for the first time rose 30K to 554K for the 19 July week, slightly below market expectations’ 557K. Continuing jobless claims on the other hand dropped 88K to 6225K for the week ended 12 July. Separately, the Reuters/University of Michigan’s consumer sentiment index fell for the first time in five months as a result of declining household wealth and rising unemployment. The July’s reading declined to 66.0, slightly better than economists’ estimates of 65.0, from 70.8 in June.

Malaysian Sovereign Bond Market

The government bond market strengthened mid- week as part of the investing market speculated that BNM may cut the OPR at the end of this month. This rally was further fueled by the headline CPI for June, which registered at -1.4% YoY, the first of a few months of technical deflation. Our house view; however maintains that OPR will be unchanged for the rest of this year.

On a WoW basis, the 3-year was unchanged at 2.90%, while the 5- and 20-year rose 4 and 2 bps to 3.75% and 4.82% respectively. The 10-year shed 1 bp to 4.29%.

The central bank also announced the new 5-year GII GJ7/14 auction at an issue size of RM4.5b. We continue to reiterate that BNM is on track to issue around RM95b worth of govvies by year end. Our view remains that the issue sizes for 2-, 3- and 5-year issuances will be between RM4-4.5b while the 10-year auction will have an issue size of RM3.5-4b.

This week, we expect market to focus on the 5-year GII GJ7/14 where we think its yield will rise to above 4.00% nearer to the
tender date.

Malaysian Corperate Bond Market

Trading activity in the PDS market improved further for the week ended 24 July to approximately RM1.9b compared to RM1.7b the week before. Similarly, trading was concentrated in the AAA and AA segments.

GG-rated Prasarana’11 and Prasarana’23 were traded at 3.10% and 4.80% respectively.

In the AAA-segment, we think that the additional 50bps offered by MISC’10 at 2.80% is more attractive than its ‘09’s last done yield of 2.30%. Likewise, we note that Plus’June11’s yield of 3.62%, which is 37bps higher than its ‘May11 paper’s yield, was on the high side although the former was done on an odd-lot deal. Meanwhile, Tesco continued to be traded at yields that are comparable to AA-rated papers as the outlook for its rating is still negative.

Over in the AA-region, YTL Power’11 (AA1) was traded at 4.14%, 24bps higher than GB3’11 (AA1), although they have comparable duration risk. The higher yield offered by YTL Power is probably the result of its less stringent distribution covenants which allow substantial cash flow distribution to its shareholders. Meanwhile, P Niaga’12 (AA), which has a shorter duration risk than Splash’13 (AA), was traded at 5.72%, 114bps higher than the later. This probably reflects the uncertainty surrounding the Selangor state’s water industry’s restructuring. Splash accepted the revised offer made by the Selangor State Government for its water assets last week.

Over in the single-A universe, B Land (A) continued to be traded and closed the week at 7.70%.

Interest Rate Swap

The IRS curve moved higher in tandem with the MGS market.