Wednesday, April 1, 2009

Interest Rates and Yield Curve in February 2009

Since last night's release of the BNM Monthly Statistical Bulletin, I've been busy updating my databases. My planned post on forex regimes will have to be put on hold while I digest (and regurgitate) all this new data - so there will be a bunch of stuff coming out on this blog over the next few days.

First, spreads in the interbank market in February have returned to positive again but just barely:

Looking at the levels, we can see here the impact of the cuts in the OPR on interbank rates:

The yield curves on BNM bills and TBills remain strongly negative however. On the other hand, given the anticipation over the stimulus package (remember, we're looking at February data here), the yield curve for MGS steepened sharply:

I know it looks like a bunch of spaghetti thrown by a patricidal 3 year old, but there's actually some sanity in the chart. Each line represents the indicative yield for a particular MGS maturity, which ranges from 1 year to 20 years. Lines moving closer (or crossing over) means the yield curve is flattening or inverting, while lines moving apart means the yield curve is steepening.

There's a sharp drop in yield at the short end, and an increase in yield at the long end. Some interpretations:

1. Flight to liquidity (risk aversion) - the market wanted more liquid instruments as economic news worsened. Prices would then be bid at the short end compressing yields, while the opposite would happen at the long end.

2. Anticipation of new supply - there was a lot of speculation over the size of the stimulus package, which had particular implications for 3 year maturities and above. Greater supply of bonds relative to demand would of course reduce price, and increase the yield.

3. Anticipation of inflation - under normal circumstances, a steepening of the yield curve would signal expectations of future inflation. Since the times aren't normal, and we're likely to have 2009 GDP under the full employment level, I'd discount this - for now.

Data from March (available here) indicates 10 year MGS yields falling back a bit, while yields on 3 year and 5 year maturities going up about 30bp.

Be that as it may, what worries me is that the spread hasn't been this high since the USD peg was abolished:

That reflects a lot of continued uncertainty in the market (higher risk premiums demanded, not inflationary expectations), and just as importantly makes capital market borrowing for the government relatively more expensive. Our soon-to-be PM's little comment about RM200 billion extra for the 2010 budget doesn't help either.

There's enough liquidity in the market to fund the RM35 billion required by the 2nd stimulus package, but I'm starting to think that a syndicated term loan from the banks (as happened in 1998) might begin to make sense soon, especially if BNM cuts the OPR by another 50-100bp.


  1. talk in d market...flattening activity is happening...

    look at latest auction only at short/mid 5 with long 20y being canceled..

    also expect some add on supply into the Gov Guaranteed segment (some expect increase of 70% in these segment)...yes market is also talking on the direct borrowing from commercial banks...

    Overall with the flurry of supply in the pipeline...buyers will have a field day...

    Perhaps a move towards Open competitive auction can help create better price formation in the primary market...too much collusion

  2. markets always give me a headache.

    Educate me bro...

    1. What's govt guaranteed segment?
    2. What's the current process of bidding? Collusion implies the variance of bids is low?

  3. gov guaranteed/quasi govt segment started off with Cagamas, then Kazanah,KLIA n the likes..u got names like Prasarana,Bank Pembangunan,etc..some got direct guarantee or a put option against the Govt embedded inside the the new(other then the existing names) supplies into these segment could be from the newly created quasi govt bond guarantee scheme...

    For bidding go here

    but these are "official" stuff..

    in reality..dealers call one another to "set the price" during auction so they can shade which side they wanna the result to be..and since there is 10 PD and each must bid min 10%... that kinda makes the whole "competitive" thinggy kinda questionable...gray market (when issue) typically provides an avenue for these participant to position their bet prior to the auction

    In PDS segment even worst, issuers at complete mercy of underwritters as it is a sell down market (since they control who can bid) they will normally take it wholesale into their book at higher yield n then sell it down at a HUGE profit(in a few days time) to all the Buyside waiting in line to buy good papers...easy money no wonder these buggers get huge bonuses...and for those in big brand name that control the flow like CIMB& AMMB....get the deal(straight from the sky by virtue of "political connection") ..n goyang kaki....and here we are kerjo keras....

    Both bidding method above are BLIND i.e. no one knows where the market is until results are out and they cannot adjust their yield/prices to reflect where the winning levels are....unless they call one another :)..even that some kencing here and there to hide their true intention

    my original comment mentions of Open Competitive Auction whereby bidders are provided where the leading yield levels(lowest + volume control) are in the last 30 minutes of the auction period, so that they can adjust their pricing..this will create true competition among bidders..some market like Korea applies this auction method....and have managed to reduce the cost of issuance

  4. Ah I see...

    e.g. govt guarantee securities = Freddie and Fannie Mae

    Thanks for the details on bidding.