Government Debt Trend and Flows

▪ MGS and GII yields mainly increased last week, moving between - 3.8bps to 3.0bps overall. The 10Y MGS yield was rangebound for most of the week, before rising around 2bps to 3.081% on Friday.

▪ Demand for MGS/GII found some support last week on positive sentiment surrounding Malaysia’s issuance of the world’s first sovereign USD Sustainability Sukuk. It was oversubscribed by 6.4x and totalled USD1.3b worth of 10Y and 30Y Trust Certificates. However, demand for local bonds was pressured by Friday after March CPI registered a 1.7% increase (Feb: 0.1%);a34-monthhigh.

▪ Yields will likely trend sideways this week, tracking relatively stable UST, as investors await the US FOMC meeting on Tuesday. Nevertheless, there may besome lingeringupward pressure onlocal yields following last week’s higher CPI reading.

▪ We expect foreign inflows into the debt market to sustain in the near-term, supported by consistently high yield differentials. However, inflows may slightly decreasethis month due to concerns regarding elevated local and global COVID-19 infections. The 10Y MGS-UST yield spread continued to increase, registering at152bps (previous week: 148bps), keeping local bonds attractive.

Auction Results (21-Apr)

▪ The 3Y MGS 06/24reopened at RM4.5b, with no private placement, and was awarded at an average yield of 2.363%.

▪ Demand was solid, with a bid-to-cover (BTC) ratio of 2.086x, bringing the April average BTC to 2.074x (March: 2.047x).

▪ The 3Y MGS 06/24 will be the new benchmark, taking over from the existing 3Y MGS 03/23.

United States Treasuries (UST)

▪ UST yields fell across the curve last week, between -2.2bps to- 0.8bps overall. The 10Y UST decreased4.2bps to 1.538% on 22 April, before closing the week at 1.558%.

▪ Demand for UST was strong last week, despite better-thanexpected US jobless claims data for the week ended 17 April (547k; previous week: 576k). There was safe-haven demand for Treasuries as global COVID-19 cases reached record highs and following reports that President Biden is expected to almost double capital gains tax for the wealthiest Americans.

▪ Yields will likely move sideways this week, in anticipation of the US FOMC meeting on Tuesday. However, there is some downside bias, as Treasuries may find safe-haven demanddue to the worsening global COVID-19 condition and in reaction to President Biden’s tax plans. Nevertheless, in the medium to long-term, an improving US recovery outlook will likely cause yields to return to its upward trend.

Ringgit Outlook

▪ MYR continued to appreciate against the USD for the fourth consecutive week. This week, we expect the ringgit to extend its gains and move closer to the 4.10 level. On the other hand, our technical modelsuggests a potential correction this week, with the MYR projected to depreciate to 4.115. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 26 Apr 2021