Government Debt Trend and Flows

• MGS and GII yields mostly increased last week, moving between - 0.7bps to 13.4bps overall. The 10Y MGS rose 1.9bps to 3.295%, whilst the 3Y MGS increased 5.4bps to 2.3%, flattening the yield curve.
   
• Demand for MGS/GII was generally pressured due to rising UST yields. Nevertheless, there was increased demand for bonds following S&P Global Rating’s review, which saw Malaysia’s sovereign credit rating reaffirmed at “A-” and the outlook maintained at “negative”. The S&P highlighted that the negative outlook was retained due to Malaysia’s elevated government debt level, higher fiscal deficit, and continued political uncertainty.
   
• Domestic yieldsare expected to increase this week,as acontinued rise in UST yields may outweigh the impact of elevated local COVID-19 cases and uncertainty over the FullMovement Control Order’s(FMCO) extension. In the medium to long-term we expect yields to continue rising, as lockdown restrictions are relaxed in line with the National Recovery Plan.
   
• Foreign inflows into the debt market will likely remain softer in the near-term amid the ongoing MCO restrictions and higher COVID-19 cases. Nevertheless, domestic bonds may find additional support following S&P’s affirmation of Malaysia’s sovereign credit rating. Additionally, local bonds remain attractive due to higher yield differentials.

Auction Results (22-June)

• The 3Y GII 10/24 reopened at RM4.5b, with no private placement, and was awarded at an average yield of 2.341%.
   
• Demand was decent, with a bid-to-cover (BTC) ratio of 2.001x, although lower than the YTD BTC average of 2.149x.
   
• The next auction is a reopening of the20YMGS05/40, scheduled to take place on 29 June. Total issuance will be RM4.0b, including RM2.0b in private placement.

Source: Kenanga Research - 28 Jun 2021