[Fixed Income Weekly] Best to wait until after June FOMC meeting

Analyst Peter Park  822-768-7577 / peter.park@nhqv.com

[Fixed Income Weekly] Best to wait until after June FOMC meeting

	KTB yields are climbing steeply amid strong expectations towards: 1) a June FF rate hike in the US; and 2) new fiscal policies and strengthened risk appetite in Korea. While an easing in price burden should attract pent-up demand, we believe that it is best to wait until after the June FOMC meeting before diving in. ▶Major issues in global bond markets Last week, upward pressure on US TB yields intensified amid: 1) strengthened risk appetite on the easing of Frexit concerns after Emmanuel Macron’s victory in the French presidential election; and 2) the Fed’s hints at the May Federal Open Market Committee (FOMC) meeting that there will be a federal funds (FF) rate hike in June. Although we believe that US TB yields are already sufficiently high when considering the slowdown in private consumption and inflation, a wait-and-see approach would likely dominate the market before the June FOMC meeting. In Korea, the bond market is focusing on the new government’s fiscal policies. First, the Ministry of Strategy and Finance (MOSF) formalized a supplementary budget of W10.0tn for the purpose of job creation (a key focus during President Moon’s election campaign). Considering that no additional KTB issuance will be needed to fund this supplementary budget, the action should not prove burdensome for domestic bond yields. However, as government fiscal policies are being expanded, the bond market is becoming somewhat nervous. Strengthening risk appetite also presents a burden for the bond market. From the perspective of asset allocation, we view domestic equities or overseas bonds as being more attractive at this juncture than domestic bonds. As such, YTD net buying by insurers and asset managers in the bond market has been far less than normal. Thus, believe that a wait-and-see attitude is the best approach in the run up to the June FOMC meeting. ▶Weekly global bond market outlook and trading recommendations Developed markets: This week, the US bond market is to remain range bound with 10yr US TB yield moving between 2.28~2.38%. Although economic indicators are slowing down, concerns towards a June FF hike are heightening. The 2/10yr TB spread, the TB-Bund spread, and the EMU spread should narrow. Domestic bond market: This week, the domestic bond market is to strengthen slightly, with 3yr KTB yield moving between 1.66~1.73%, 5yr KTB yield ranging between 1.87~1.96%, and 10yr KTB yield fluctuating between 2.22~2.32%. Despite lessened price burden, investors will likely be passive due to the fiscal policies being rolled out by the new government. Asia (excluding Japan): Despite the possibility of a June FF rate hike, the fact that the FF rate hike upcycle is being conducted at a slow pace should insulate the carry merit of Asian bonds. Our investment suggestion for the region in order of preference is: Indonesia, Malaysia, Thailand, and China. Trading recommendations: We advise: 1) maintaining a US TB 2/10yr flattener position; 2) remaining long on 5yr Indonesian government bonds; and 3) adhering to a ‘long on 10yr TB and short on 10yr Bund’ position .