Government Debt Trend and Flows

▪ MGS and GII yields were mixed last week, with the middle to longend of the curve rising. The 10Y MGS yield increased by 1.9bps to 3.061%, whilst the 3Y MGS fell 2.4bps to 2.101%, marginally steepening the yield curve.

▪ Demand for MGS/GII was initially pressured last week in anticipation of the release of key US economic data. However, demand improved by midweek following the strong auction of the 15Y MGII 07/36 and tracking falling UST yields.

▪ Yields may decrease this weekas a resultof a worsening local COVID- 19 situation, with new infections rising above the 2,000 level for the first time since early March. Nonetheless, in the medium to longterm MGS/GII yields will likely move higher following an expected domestic economic recovery.

▪ We expect foreign inflows into the debt market to continue in the near-term, supported by high yield differentials and FTSE Russell’s positive review. However, inflows may lessen this month due to concerns regarding rising domestic COVID-19 cases, as well as growing global risk-off sentiment. Then again, the 10Y MGS-UST yield spread increased to 148bps (previous week: 138bps), which will help keep local bonds attractive.

Auction Results (14-Apr)

▪ The 15Y MGII 07/36 reopened at RM4.5b, of which RM2.0b was privately placed, and was awarded at an average yield of 4.01%

▪ Demand was strong, with a bid-to-cover (BTC) ratio of 2.545x, which is greater than the YTD average BTC of 2.145x

▪ The next auction is a reopening of the 3Y MGS 06/24, with an expected issuance of RM3.5b with no private placement.

United States Treasuries (UST)

▪ UST yields mostly decreased last week, except for the 3Y and 2Y UST. The 10Y UST fell 7.9bps to 1.58%, almost reaching a 5-week low.

▪ Demand for UST was solid last week, despite higher-thanexpected US CPI at 2.6% YoY inMarch (Feb: 1.7%), its highest level since August 2018. This could have been due to the unwinding of bearish bets against Treasuries, along with a global risk-off sentiment, amid a rise in worldwide COVID-19 cases and heightened geopolitical tensions after the US imposed sanctions on Russia.

▪ Yields may return to their upward trend this week, driven by the higher inflation rate and strong economic data released end of last week. US jobless claims decreased to 576k for the week ended 10 April (previous week: 769k), its lowest level in a year. Additionally, US retail sales reboundedsharply by9.8% in March (Feb: -2.7%), a 10-month high. However, prevailing global riskoff sentiment may cap any rise in UST yields.

Ringgit Outlook

▪ MYR continued to appreciate against the USD last week amid falling UST yields. This week, we expect it to trade in a tight range and the local note could face pressure due to rising domestic COVID-19 cases. Our technical model suggests that the MYR may depreciate marginally, to reach 4.128vis-a-vis the USDthis week.

(Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 19 Apr 2021