Government Debt Trend and Flows

▪ MGS and GII yields mostly increased last week, except for the 3Y, 15Y and 30Y MGS, which moved between-6.1bps to-1.9bps. The 10Y MGS rose 11.1bps to reach 3.486% on Monday, before closing the week lower at 3.448%.

▪ Demand for MGS/GII was mixed last week, astheyinitially faced heavy pressure from higher UST yields, but was then supported by bargain hunting activity and possibly elevated foreign demand. Nevertheless, yields resumed rising by the end of the week, as the 10Y UST breached the 1.70% level and following the announcement of the RM20.0b PEMERKASA stimulus package, which fuelled concerns regarding increased supply of MGS/GII.

▪ MGS/GII yields may continue to rise in the near-term, tracking an expected increase in UST yields and pushed higher by the possibility of PEMERKASA being financed by further MGS/GII issuance. Moreover, investors may be cautious ahead of FTSE Russell’s 29thMarch review of Malaysian bonds on the World Government Bond Index.

▪ We still expect the debt market to continue attracting foreign demand in the near-term, amid higher yield differentials. The 10Y MGS-UST yield spread marginally decreased to 173bps (last week: 175bps; Feb average: 164bps).

Upcoming Auction

▪ The 5Y MGS 09/25 is expected to be issued on 23rd

March, at RM4.5b with no private placement.

▪ The previous reopening of this security saw a strong bid-to-cover (BTC) ratio of 2.803x in September 2020, however we expect a lower BTC for this auction amid a global bond sell-off and weaker demand at recent auctions (March BTC average: 1.911x).

United States Treasuries (UST)

▪ UST yields mostly increased last week, risingbetween 0.2bps to 9.3bps, except for the 3Y UST, which fell 0.7bps to 0.329%. The 10Y UST increased at a faster pace to reach 1.721%, its highest level in over a year.

▪ The UST yield curve steepened following the Fed’s decision to keep rates and asset purchasing unchanged at last week’s FOMC meeting. As such, longer-dated bondyieldsincreased substantially, amid improving growth optimism, wider vaccine distribution, and the rollout of the USD1.9t fiscal stimulus package.

▪ The Fed’s commitment to an ultra-loose policy stance, even if inflation momentarily exceeds the 2.0% target, may drive yields of longer-dated bonds even higher. Coupled with the sizeable American Rescue Plan, this will likely cause UST yields to continue rising in the near-term, whilst further steepening the yield curve.

Ringgit & Monetary Policy Outlook

▪ The MYR marginally appreciated against the USD last week, despite falling crude oil prices, and may continue to move sideways this week amid rising UST yields. Nevertheless, our technical model suggests the ringgit may depreciate to 4.112 this week. (Please refer to our Ringgit Weekly Outlook report)

▪ The US Fed maintained the funds target range between 0 – 0.25% at last week’s FOMC meeting, reiterating a fairly dovish message. Additionally, the Fed upgraded their 2021 growth forecast to 6.5% from 4.2% and raised their year-end inflation forecast to 2.4% from 1.8%. Hence, we expect BNM’s monetary stance to remain status quo for the year.

Source: Kenanga Research - 22 Mar 2021