Government Debt Trend and Flows

▪ MGS and GII yields mostly increased last week, except for the 5Y MGS. The 10Y MGS rose 9.6bps to 3.177% on 28 April, before closing the week at 3.123%. The 3Y MGS surged 25.4bps to 2.366% as the new benchmark takes its place.

▪ Demand for MGS/GII was generally pressured last week, on the back of strong March exports data (31.0% YoY; Feb: 17.6%) and amid rising UST yields. Nevertheless, demand found some support by the end of the week as elevated local COVID-19 cases raised concerns about the potential return of stringent lockdown measures.

▪ Yields may rise this week, tracking UST movements and boosted by potentially strong economic data. We maintain that in the medium to long-term MGS/GII yields will likely move higher following an expected domestic economic recovery. However, downside risks remain amid elevated domestic COVID-19 cases.

▪ We still expect foreign inflows into the debt market to persist in the near-term, supported by high yield differentials. However, April inflows may have moderated as a result of concerns regarding high local and global COVID-19 infections. The 10Y MGS-UST yield spread decreased to 150bps (previous week: 152bps).

Upcoming Auction

▪ The next auction is the reopening of the 30Y GII 11/49, estimated at RM4.0b, of which RM1.0b is projected to be privately placed.

▪ The previous reopening of this security saw a weak bid-to-cover (BTC) ratio of 1.358x in September 2020, however we expect stronger demand for this auction, in line with the current YTD average BTC of 2.14x.

United States Treasuries (UST)

▪ UST yields mostly increased last week, except for the 3Y and 2Y UST. The 10Y UST rose 6.8bps to 1.626%, its highest level in nearly two weeks. The 2Y UST remained at 0.158%, causing the yield curve to steepen.

▪ Demand for UST was pressured ahead of the US FOMC meeting, with the market expecting the Fed to announce an improved growth outlook. Furthermore, UST demand was affected by strong economic data, as 1Q21 GDP growth registered 6.4% (4Q20: 4.3%) and initial jobless claims decreased further to 553k (previous: 566k) for the week ended 24 April.

▪ Yields will likely increase this week, on the back of the Fed’s comments of an improving recovery outlook and higher inflation to be expected going forward. Additionally, yields may be pushed higher as a result of President Biden’s recent announcement of another USD1.8t stimulus package, dubbed the “American Families Plan”.

Ringgit & Monetary Policy Outlook

▪ MYR continued to appreciate against the USD for the fifth consecutive week. This week, we expect the ringgit to seesaw between the range of 4.08 – 4.10. However, our technical model suggests a potential reversal, with the MYR projected to depreciate to 4.099 this week. (Please refer to our Ringgit Weekly Outlook report)

▪ At last week’s FOMC meeting, the US Fed maintained the funds target range between 0.0% – 0.25% and stayed committed to USD120.0b in monthly bond purchases. The Fed also acknowledged that US growth recovery has strengthened, and inflation has risen, with higher inflation set to arrive as a result of low YoY base effects. This is in-line with our expectation, and we foresee Bank Negara Malaysia unlikely to cut its overnight policy rate of 1.75% further in 2021.

Source: Kenanga Research - 3 May 2021