Government Debt Trend and Flows

▪ MGS and GII yields decreased across the curve last week, moving between-14.2bps to-0.4bps. The 10Y MGS fell 11.2bps to 3.336%, its lowest level in two weeks.

▪ Demand for MGS/GII was relatively strong last week, with yields largely trackingfalling UST yields, amid renewedrecoveryconcerns after several EU countries returned to lockdown due to rising COVID-19 infections. This decline in yieldscomes despitea weak 5Y MGS auction and Malaysia’s CPI returning to positive territory in February (0.1%; Jan: -0.2%) after eleven months of deflation.

▪ Yields may move range-bound this week, tracking UST movements, but with an upside bias. Demandfor MGS/GII may witness some pressure ahead of FTSE Russell’s review of Malaysian bonds on the World Government Bond Index, expected to be released later today (29thMarch). Furthermore, MGS/GII yields will likely rise in the long term as COVID-19 vaccines continue to be distributed and as additional MGS/GII may be issued to finance the PEMERKASAfiscal package.

▪ We still expect the debt market to continue attracting foreign demand in the near-term, amid higher yield differentials. However, the 10Y MGS-UST yield spread decreased to 166bps (last week: 173bps; Feb average: 164bps).

Auction Results (22-Mar)

▪ The 5Y MGS 09/25 reopened at RM4.5b and was awarded at an average yield of 2.764%.

▪ As expected, demand was relatively weak with a bid-tocover (BTC) ratio of 1.789x, which wasmuch lower than the previous reopening of this security in September 2020 (2.803x). Demand for auctions may average around 2.0x BTC for the time being, amidbroad-basedweakness in local and global bond markets.

United States Treasuries (UST)

▪ UST yields fell across the curve last week, moving between -4.5bps to - 1.54bps. The 10Y UST decreased by 6.8bps to reach 1.608% on 24th

March, before closing the week at 1.676%.

▪ Demand for UST improved last week following ChairmanPowell’s warning that economic recovery was “far from complete” and on the back of several strong auctions. Furthermore, sentiment appears to have turned risk-off amid a resurgence in COVID-19 infections in Europe, prompting some EU countries to reimpose lockdown measures. Nevertheless, demand for UST saw some pressure towards the end of the week, following improved initial jobless claims data (684k; previous week: 770k) and a weaker 7Y UST auction.

▪ UST yields may move sideways this week, with a slight upside bias. Despite the Fed’s decision to allow the Supplementary Leverage Ratio (SLR) exemption to expire on 31st March, yields are unlikely to be pushed considerably higher, as U.S. banks have mostly prepared for this event by offloading bonds over the last two months. Nevertheless, we expect yields to continue rising in the long-term, particularly considering President Biden’s plan for an additional USD3.0t in infrastructure spending.

Ringgit Outlook

▪ MYR depreciated slightly against the USD last week however we expect it to trade higher this week on a potential recovery of crude oil prices. Our technical mode supports this, suggesting the ringgit may appreciate to 4.136 this week. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 29 Mar 2021