Treasure pulse

Global foreign exchange market

A DEBT crisis has been averted for now as Greece's parliament approved a detailed five-year austerity plan worth 28 billion euros, thus paving way for the country to receive additional aid. The plan is targeted to reduce Greece's fiscal deficit to 1.1% of (gross domestic product (GDP) by 2015, from a whopping 10.5% in 2010. It also detailed the nation's five-year 50 billion-euro privatisation plans.

Relieve also came as Germany's Finance Minister Wolfgang Schauble indicated that German banks have agreed on longer maturities for Greek bonds that will be due in 2014.

Investors' resurging interest to hold euro also came as European Central Bank (ECB) president Trichet indicated that policymakers were in “strong vigilance mode,” alluding to a possible rate hike as the central bank convenes next week. Sentiments were also lifted as European Union officials approved extensions to Portugal's bank recapitalisation and bank-guarantee programmes. Euro strengthened by 2.34% against the US dollar to trade above 1.4500-levels at press time.

Returning risk appetite also witnessed the VIX volatility index to shed 5 points to 16.52, the lowest level in a month.

During the week, the pound traded at a low of 1.5911 against the greenback, before recovering to 1.6000-levels as at 12pm yesterday.

Uncertainties emanating out of the Europe also drove increased volatility in higher-yielding currencies. Australian dollar/US dollar traded in a wide range during the week, touching a low of 1.0391 before rebounding to the 1.0700-region. Volatile movements were also seen in Asian currencies, including the ringgit. Indeed, US dollar/ringgit traded in the bandwidth of 3.0133 to 3.0640 during the week.

The Chinese local governments were reported to have incurred about 10.7 trillion yuan (US$1.7 trillion) in debt as of end-2010, about half of which was held by financing vehicles. The report, done by the National Audit Office on its first-ever audit on local government finances, also warned of repayment risks, including reliance on land sales and investment in stock markets. Nevertheless, local governments have pledged to use land sales' proceeds to repay around 2.6 trillion yuan in debt.

In the coming week, we expect investor sentiments to further improve as meetings of the eurozone finance ministers on July 3 and the Internationa Monetary Fund on July 5 are expected to endorse disbursement of additional aid to Greece. Nevertheless, investors are bound to remain cautious over Greece's developments, in addition to focus on US economic data.

Next week, markets are going to eye especially on the US non-manufacturing sector for fresh leads. Against this backdrop, we expect US dollar/ringgit to trade within the range of 2.9900 to 3.0300 with support to remain strong at the psychological 3.0000-level.

US Treasuries (UST) market

During the week, UST yields bear steepened as Greece's improving situation dampened safe haven demand. On June 30, markets witnessed the end of the second quantitative easing package as the Federal Reserve purchased its final US$4.91bil in Treasuries. The two-year yields rose by 12bps to 0.450%, while 10-year yields added 29bps to trade at 3.151%.

Malaysian bond market

During the week, the Government successfully sold US$2bil of Wakala Global Sukuk comprising of 5- and 10-year maturities.

The bond sale garnered robust demand from a diverse group of investors from the Middle East (29%), Malaysia (27%), Asia (22%), Europe (14%) and the US (8%). Proceeds raised will be used to refinance the Government's existing US$1.75bil conventional bond maturing July 2011.

Likewise, the new RM2bil 20-year Malaysian Government Securities (MGS) maturing June 2031 garnered a healthy demand of 2.524 times with an average yield of 4.232%. Being the only 20-year MGS auctioned in 2011, the mentioned bonds were well-subscribed by players, given the readily available demand from both pension and insurance funds. A corresponding RM1.5bil of the same 20-year MGS bonds was privately placed out.

RM14.8bil trades were transacted in the MGS/GII market, with a daily average trading volume of RM3.7bil versus last week's daily average of RM2.4bil.

At the shorter-end of the curve, the three-year benchmark yield climbed 10 bps to close at 3.26% as at Thursday, while the five- and seven-year yields increased 2 bps to 3.51% and 3.72%. At the longer-end, the 10-year yield rose 1 bp to 3.93%, the 15-year yield rose 2 bps to 4.12% while the new 20-year benchmark closed at 4.24%.

In the Public Debt Securities market, a total of RM1.7bil worth of trades were transacted. The GG/AAA segment and the AA segment contributed 48% and 47% of the trades, while the remaining 5% were contributed by the single-A segment. Daily average trade volume stood at RM433mil, markedly lower than RM706mil in the previous week.

In the GG/AAA segment, yields on Danga 4/15 closed 6 bps higher at 3.86% with RM210mil done, Rantau Abang 8/13 and 9/15 closed 1-2 bps lower at 3.50%-3.88% with RM235mil done in total, while Pengurusan Air SPV 6/16 and 6/18 closed at 3.83%-4.02% with RM115mil done in total. In the AA segment, bulk of the trades were done on Sarawak Energy bonds maturing 2018-2026. Yields on the said bonds closed 5-10 bps lower at 4.30%-5.23% with RM295mil done in total.

Ringgit interest rate swap (IRS) market

Sentiment improved after Greek lawmakers authorised an austerity plan to unlock financial aid and it has supported the ringgit IRS rates to trade higher.

Yield curve steepened by 1-10 bps during the week.