Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 1 Nov 2021, 9:36 AM


Bond Market Weekly Outlook - MGS/GII Yields to Trend Rangebound-to-lower on Omicron Concerns

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Government Debt Trend and Flows

▪ MGS and GII yields mostly decreased last week, moving between -11.7bps to 1.9bps overall. The 10Y MGS yield initially rose by 1.9bps to 3.542% on Dec 1, before closing the week slightly lower at 3.519% (-0.4bps).

▪ Safe-haven demand for MGS/GII was strong for most of last week driven by concerns surrounding the Omicron variant. This was heightened by the release of US non-farm payrolls data, which came in considerably lower than expected and led to plunging UST yields.

▪ Domestic yields may trend rangebound-to-lower this week, as Malaysian bonds will likely continue to find safe-haven demand amid concerns surrounding the Omicron variant and UST yields are expected to decline following the disappointing non-farm payrolls print.

▪ We expect foreign inflows into the Malaysia bond market to soften in the near-term following a rise in global risk-off sentiment, due to the Omicron variant, as well as the Fed tapering its asset purchases and persistently high global inflation raising the likelihood of an earlier Fed rate hike. Nonetheless, Malaysian bonds may find some support from increasingly high yield differentials and a potentially strong economic recovery in 4Q21.

Auction Results (29-Nov)

▪ The 20Y MGS 05/40 reopened at RM3.5b, including RM1.5b worth of private placement, and registered an average yield of 4.145%.

▪ Demand was decent, registering a bid-to-cover (BTC) ratio of only 1.888x despite the relatively small auction size of RM2.0b.

▪ The next auction is a reopening of the 7Y GII 08/28 scheduled for Dec 6 and amounting to RM3.5b with no private placement.

United States Treasuries (UST)

▪ UST yields mostly decreased last week, moving between -14.9bps to 8.9bps overall. The 10Y UST yield plunged by 13.0bps to 1.343%, its lowest level in 3 months, whilst the 2Y UST rose by 8.9bps to 0.587%.

▪ Treasuries experienced strong risk-off demand amid continued fears around the Omicron COVID-19 variant, with the US recording its first confirmed case last week. Furthermore, yields fell following a disappointing US jobs report, as non-farm payrolls increased by only 210.0k in November (Oct: 546.0k), well below expectations. Meanwhile, short term yields increased due to Chairman Powell’s statement that the US Fed may quicken the pace of its asset tapering schedule.

▪ Yields may continue to fall this week amid persistent riskoff sentiment, due to fears regarding the Omicron variant. However, the downside may be capped by potentially high US inflation data, scheduled to be released end of this week.

Ringgit Outlook

▪ MYR registered a marginal gain against the USD last week, mainly due to China’s improving economic outlook and the widening 10Y MGS-UST yield spread. This week, we expect the ringgit to weaken to around the 4.23 – 4.25 range due to risk off sentiment from concerns regarding the Omicron variant and a potential rise in US inflation. On the other hand, our technical model suggests the MYR may appreciate by 0.12% to 4.226 this week. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 6 Dec 2021

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