Government Debt Trend and Flows

▪ MGS and GII yields broadly decreased last week, moving between - 10.4bps to -1.5bps overall. The 10Y MGS initially rose 1.3bps to 3.308% on 29 June, before closing the week 7.7bps lower at 3.218%.

▪ Demand for MGS/GII was initially pressured last week due to the announcement of the RM150.0b PEMULIH economic package, which fuelled supply concerns. However, this reversed by end of the week, amid quarter-end repositioning demand, positive sentiment following the strong auction of the 20Y MGS, and risk-off demand as daily COVID-19 cases remained above the 6,000 level.

▪ Domestic yields will likely trend rangebound this week, with a downside bias, as Selangor and areas of KL enter a tighter Enhanced MCO between 3 July – 16 July. However, in the medium to longterm we still expect MGS/GII yields to return to an uptrend; driven by the US Fed’s hawkish shift and the gradual reopening of the domestic economy, in line with the National Recovery Plan.

▪ Foreign inflows into the debt market are expected to remain weak in the near-term given the extension of Phase 1 lockdown restrictions, persistently high local COVID-19 cases, and concerns about the global spread of the Delta variant. Nevertheless, domestic bonds may still find some support given their attractive yield differentials and Malaysia’s recent sovereign credit rating affirmations.

Auction Results (29-June)

▪ The 20Y MGS05/40 reopened at RM4.0b, of which RM2.0b was privately placed, and was awarded at an average yield of 4.254%.

▪ Demand was strong, with a bid-to-cover (BTC) ratio of 2.651x (YTD average: 2.175x).

▪ The next auction is a reopening of the 15Y GII07/36, with an estimated total issuance of RM4.5b, inclusive of a projected RM1.0b in private placement.

United States Treasuries (UST)

▪ UST yields decreased across the curve last week, moving between -10.8bps to -3.3bps overall. The 10Y UST dropped 10.0bps to 1.424%, an 18-week low.

▪ Strong safe-haven demand for the UST was driven by concerns surrounding the global spread of the COVID-19 Delta variant. Demand was likely boosted by quarter-end portfolio repositioning, despite a sustained improvement in US employment. Initial Jobless Claims reached a pandemic low of 364k for the week ending 26 June (previous: 415k).

▪ Yields may move sideways this week, with an upside bias, as the release of strong Non-Farm Payrolls (NFP) data may be offset by sustained fears surrounding the Delta variant. US NFP increased by 850k in June (May: 583k), above consensus estimates of 720k, and reaching its highest level in 10 months. However, the unemployment rate edged up to 5.9% (May: 5.8%), indicating that more people voluntarily left their jobs and the number of job seekers increased in June.

Monetary Policy & Ringgit Outlook

▪ Bank Negara Malaysia (BNM) will likely keep the overnight policy rate unchanged (1.75%) at their 4th Monetary Policy Committee meeting on 8 July and for the rest of the year. This is premised on the expectation of better economic growth in 2H21 and rising inflation expectations. Furthermore, the US Fed’s recent hawkish shift is expected to put BNM on pause from any further monetary easing. Accordingly, we reckon BNM may raise the rate at least by mid-2022 ahead of the US Fed.

▪ MYR continued to decline amid increased demand for USD, mainly due to rising concerns over the global spread of the Delta variant. MYR may remain subdued this week, hovering around the 4.16 level. On the other hand, our technical model suggests the ringgit may reverse its weakness and gain 0.14% against the greenback, to reach 4.157 this week. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 5 Jul 2021