Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 22 Oct 2021, 9:44 AM


Bond Market Weekly Outlook - MGS/GII Yields to Rise on Improving COVID-19 Condition and Supply Concerns

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Government Debt Trend and Flows

▪ MGS and GII yieldsincreased across the curve,rising between0.7bps to 9.1bps overall. The 10Y MGS yieldincreased by 7.4bps to 3.324%, reaching its highest level since March.

▪ Demand for government bonds continued to be pressured last week, with yields soaring after the tepid 10Y MGS auction. This may have been exacerbated by growing concerns regarding bond supply, following the government’s proposal to raise the statutory debt ceiling to 65.0% of GDP from 60.0%, as well as increasing the size of the COVID-19 Fund by RM45.5b; these proposals will be tabled to parliament in October.

▪ Domestic yields may continue to rise this week, driven by the improving COVID-19 situation, the further relaxation of restriction measures, and concerns regarding supply of bonds. Inthelong-term we expect domestic yields to trend higher, given the probability that the US Fed may begin tapering by the end of the year.

▪ As the domestic political condition continues to stabilise, we expect the high yield differentials of local bonds to continue attracting foreign demand; the 10Y MGS-UST yield spread increased to 196.2bps last week (previous: 190.9bps). Demandmayalso be driven by Malaysia’s strong vaccination progress, the further easing of lockdown measures, and the presentation of the 12th Malaysia Plan later this month.

Auction Results (14-September)

▪ The 10Y MGS 04/31 reopened at a slightly larger-thanexpected issuance of RM5.5b, of which RM1.5b was privately placed, and was awarded at an average yield of 3.292%.

▪ Demand was weak, with a bid-to-cover (BTC) ratio of 1.606x on a relatively large auction size of RM4.0b, registering below the YTD average BTC of 2.215x.

▪ The next auction is a reopening of the 5Y GII 03/26, and we estimate an issuance of RM4.5b with no private placement.

United States Treasuries (UST)

▪ UST yields mostly increased last week, moving between - 3.5bps to 4.4bps overall, with the long end of the curve pressured. The 10Y UST yield initially decreased by 4.2bps to 1.229% on Sep 15, before rising to 1.362%, closing the week higher (+2.1bps).

▪ Demand for UST was initially strong last week afterUS inflation registered slightly lower-than-expected in August (5.3%; Jul: 5.4%), potentially indicating that inflation had peaked. However, by mid-week demand for USTbecame pressuredon the back of a surprise rebound in US retail sales, which rose 0.7% MoM in August (Jul: -1.8%).

▪ Yields may trend rangebound-to-higher this week,amid the US FOMC meeting on Tuesday (Sep 21), where the Fed may provide further details regarding its tapering timeline. Nevertheless, we do not expect a tapering announcement at this meeting given the uneven labour market recovery, which raises the probability of a decision in November or December.

Ringgit Outlook

▪ MYR depreciated against astrengthening USD last week,and the ringgit sell-off is likely to continue this week as the dollar may remain bullish ahead of the FOMC meeting. On the other hand, our technical model suggests the MYR may stage a rebound and appreciate marginally by 0.25% to 4.161 this week. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 20 Sept 2021

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