Government Debt Trend and Flows

• MGS and GII yields increased across the curve last week. The 10Y MGS rose 6.9bps to 3.299% on 17 June, its highest level in nearly 12-weeks, before closing the week at 3.276%.
   
• Demand for MGS/GII was pressured last week following the US Fed’s surprisingly hawkish tone and the resulting rise in UST yields. However, towards the end of the week demand for local bonds returned as middle to long-tenure UST yields erased their post-FOMC gains.
   
• Domestic yields may trend rangebound this week, in tandem with lower UST yields as investors digest the Fed’s policy update. Some upside pressure remains given the Fed’s hawkish turn, but local yields will likely remain supressed due to persistently high domestic COVID-19 cases and ongoing political uncertainty. In the medium to long-term we expect yields to return to an uptrend, as lockdown restrictions are relaxed in line with the National Recovery Plan.
   
•  Foreign inflows into the domestic debt market will likely remain softer in the near-term amid the ongoing Full Movement Control Order and highdomestic COVID-19 cases. Nonetheless, local bonds will still attract demand due to high yield differentials and FTSE Russell’s decision in favour of Malaysian bonds. In the medium-term, the outlook for inflows will be dependent on the outcome of Malaysia’s sovereign credit review by S&P Global Ratings. The 10Y MGS-UST yield spread continued to rise (184bps; previous week: 178bps)

Upcoming Auction (22-June)

• The reopening auction of the 3Y GII 10/24 is scheduled to take place on 22 June, with an issuance of RM4.5b and no private placement. This security will replace the 3Y GII 05/23 to become the new benchmark.
   
• The previous reopening of this security saw a very strong bid-to-cover (BTC) ratio of 3.093x in October 2020.

Source: Kenanga Research - 21 Jun 2021