Government Debt Trend and Flows

▪ MGS and GII yields were mixed last week, with the 20Y MGS moving -11.6bps to 4.032%, whilst the 3Y MGS rose 4.5bps to 2.241%. The 10Y MGS yield continued to decline, moving -8.0bps to 3.138% on 8 July, before closing the week at 3.187%.

▪ MGS/GII experienced strong risk-off demand, especially among the middle and long tenures, given the worsening domestic COVID-19 condition, the implementation of Enhanced Movement Control Orders (EMCO) in several areas of Malaysia, and a broad decline in UST yields. Additionally, MGS and GII registered higher foreign holdings in June (please refer to our MY Bond Flows report).

▪ Domestic yields may decline this week, as risk-off sentiment persists amid rising COVID-19 cases and potentially extended lockdown restrictions. This may be further exacerbated as UST yields remain low, driven by fears of a global spread of the Delta COVID-19 variant.

▪ Foreign demand for domestic debt is expected to remain pressured in the near-term given elevated local COVID-19 cases and the implementation of the EMCO. Nevertheless, in the medium-term we expect foreign inflows to return as lockdown measures are eased in the coming months, and as local bonds remain supported by high yield differentials and the recent reaffirmations of Malaysia sovereign credit ratings.

Upcoming Auction

▪ 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.

▪ The previous issuance of the 15Y GII in January 2021 saw a strong bid-to-cover (BTC) ratio of 2.917x. For this upcoming auction, we expect there to be comparably strong demand, driven by elevated riskoff sentiment.

United States Treasuries (UST)

▪ UST yields fell across the curve last week, moving between - 7.5bps to -2.1bps overall. The 10Y UST initially plunged by 13.1bps to 1.293% on 8 June, its lowest level since February, before closing the week higher at 1.36%.

▪ UST continued to experience strong safe-haven demand due to fears surrounding the global spread of the COVID-19 Delta variant. There was also some market concern amid weaker-thanexpected June US economic data. In addition to the slight uptick in the US unemployment rate (5.9%; May: 5.8%), the ISM nonmanufacturing PMI decreased to 60.1 (May: 64.0), indicating a slowdown in the service sector. However, by end of the week UST yields rallied,easing some concerns about a global economic slowdown.

▪ Yields may move rangebound to lowerthis week, as COVID-19 related fears will likely sustain risk-off demand for UST. Additionally, US initial jobless claims unexpectedly rose to 373k for the week ended 3 July (previous: 371k), hinting at a potential slowdown in job growth.

Monetary Policy & Ringgit Outlook

▪ Bank Negara Malaysia (BNM) maintained the overnight policy rate (OPR) at 1.75%, as expected, but recognised that downside risks to growth remain, due to the state of the COVID-19 pandemic locally and abroad. Nevertheless, we still expect BNM to keep the OPR unchanged for the rest of the year and allow fiscal policy to take the lead. However, should lockdown restrictions be extended further and the domestic political tussle get out of hand, bringing about policy uncertainty, the probability of a rate cut would increase.

▪ MYR continued to depreciate against the USD last week, reaching its lowest level since mid-August 2020, and we expect it to remain volatile this week. On the other hand, based on our technical model, if the USDMYR moves towards the 5-day EMA of 4.175 we may see an MYR bullish reversal. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 12 Jul 2021