Government Debt Trend and Flows

▪ MGS and GII yields were mixed last week moving between -6.3bps and 8.6bps overall. The 10Y MGS edged lower by 0.4bps to 3.203%, whilst the 5Y GII increased by 8.6bps as the reopened 5Y GII 03/26 became the new benchmark.

▪ Despite the recent rise in inflation, MGS/GII yields were mostly rangebound last week, supported by risk-off demand amid soaring local COVID-19 cases and tighter Movement Control Order (MCO 3.0) restrictions.

▪ Yields will likely fall this week, as the government recently announced a total nationwide lockdown between 1 June and 14 June, in a bid to combat rising COVID-19 cases. Malaysia will go into a full-scale MCO for all social and economic sectors, except for essential services. Nevertheless, strong domestic exports data released last Friday and an expected rise in UST yields, should limit the fall in MGS/GII yields this week.

▪ Foreign inflows into the debt market may moderate in the near term due to investor concerns regarding rising local COVID-19 cases and the implementation of a total MCO lockdown potentially affecting Malaysia’s growth recovery. Nevertheless, local bonds still remain attractive due to high yield differentials, withthe 10Y MGS-UST yield spreadincreasingto 161bps(previous week: 159bps). 

Auction Results (28-May)

▪ The 5Y GII 03/26 reopened at RM4.5b and was awarded at an average yield of 2.728%.

▪ Demand was decent, with a bid-to-cover (BTC) ratio of 2.003x, although lower than the YTD BTCaverage of 2.169x.

▪ The next auction is a reopening of the 10Y MGS 04/31, with an estimated issuance of RM5.0b and private placement.

Source: Kenanga Research - 31 May 2021