Government Debt Trend and Flows

▪ MGS and GII yields continued to move higher last week, rising between 7bps to 19.9bps overall. The 10Y MGS increased 19.9bps to 3.284%, an 11-month high.

▪ MGS/GII yields were initially steady at the beginning of the week, amid bargain hunting demand. However, yields surged by Friday as demand plunged, on the back of BNM’s decision to stand pat on the OPR and following a resumed rise in UST yields. The 30Y MGS auction drew modest demand but was unable to support wider demand for government debt.

▪ MGS/GII yields will continue to trend upward tracking the sustained rise in UST yields and following last week’s weaker-than-expected MGS auction. Furthermore, BNM’s improved outlook on a domestic economic recovery may pressure demand for bonds, as the OPR is expected to remain at 1.75% through 2021.

▪ Although we expect foreign demand for local debt to remain relatively high, amid expectations of a domestic economic recovery, the global bond sell-off will likely lead to a moderation in foreign bond flows. Despite this, the 10Y MGS-UST yield spreadhas continued to rise(172bps; last week: 168bps; Feb average: 164bps), keeping Malaysian bonds attractive. As such, we project a softer net increase in foreign bond flows in the near-term.

Source: Kenanga Research - 8 Mar 2021