Government Debt Trend and Flows

▪ MGS and GII yields increased at a softer pace, except for the 10Y GII, which surged 24.1bps ahead of last week’s auction. The 10Y MGS rose 9.1bps to 3.375%, its highest level in a year.

▪ MGS/GII remained generally pressured last week, driven by the continued rise in UST yields. There was some midweek demand on the back of positive bond flows data, which saw foreign inflows for Malaysian debt expanding in February (RM7.2b; Jan: RM3.7b). However, this was outweighed by selling pressure following the weaker 10Y GII auction on Friday.

▪ MGS/GII yields will likely continue increasing in the near-term, in line with rising UST yields and following last week’s weaker GII auction. However, elevated foreign demand and a consistently high MGS-UST yield spread may limit the rise in local yields.

▪ We expect the debt market to continue attracting foreign demand in the near-term, as high yield differentials keep local bonds attractive, even whilst investors exit from U.S. and other developed bond markets. The 10Y MGS-UST yield spread increased to 175bps (last week: 172bps; Feb average: 164bps).

Source: Kenanga Research - 15 Mar 2021