Thursday, June 24, 2010

Malaysia curve steepens as short yields fall

HONG KONG: The Malaysian yield curve steepened on Thursday, June 24 as expectations of a stronger ringgit fueled buying on the short end of the curve while long-dated bonds came under profit-taking pressure after a recent rally.

The country's central bank governor, Zeti Akhtar Aziz, told Reuters on Wednesday said the ringgit's 6% rise this year reflected improvement in its economy and the bank did not expect to heavily intervene in the currency market.

The comments prompted active trading on the short end of the curve, which had underperformed the longer end in recent weeks, and pushed five-year yields down one basis point to 3.54%, its lowest since late May.

"Sentiment is also positive after the government said it will borrow less at next week's auction which means less of a supply concern in the market," said Nik Mukharriz, a fixed-income research analyst at CIMB Investment Bank in Kuala Lumpur.

The central bank said it would sell 3 billion ringgit of bonds on June 30 less than market expectations of 3.5 billion ringgit.

But the 10-year bond yield rose 4 bps to 4.04%, as investors booked in profits from a rally that took the yield to a one-month low on Wednesday. The 10-year yield has dropped by nearly 10 bps so far this month on expectations the government would borrow less from the local markets.

During the first four months of the year, total inflows into ringgit government bonds stood at 16 billion ringgit compared with 12 billion ringgit for all of 2009, according to the central bank's website.

The ringgit, the best performing Asian currency this year, rose on Thursday, moving towards a six-week high of 3.18 per dollar hit earlier this week.

Barclays expects the ringgit to rise to 3.05 versus the dollar over the next year, its highest since the 1997 Asian crisis, as the country's bonds and stocks draw more interest from offshore investors.

In Indonesia, the finance ministry's plans to offer investors more longer-tenor paper via a debt swap is expected to steepen the yield curve slightly as investors demand a slight premium in yield terms to hold longer-maturity debt.

Handy Yunianto, a debt strategist at Mandiri Sekuritas in Jakarta, said the curve is already quite flat compared to some of its regional counterparts like Philippines and Vietnam and the debt swap would give some investors an excuse to take profits.

Ten-year yields are trading at a record low of 8%, having dropped by more than 100 basis points this month alone.

JP Morgan's index for emerging Asian bonds is up 1% so far this quarter compared to 4% in the March quarter. ' Reuters

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