Government Debt Trend and Flows

▪ MGS and GII yields were mixed last week, moving between -2.1bps to 2.9bps overall. The 10Y MGS initially rose 6.7bps to 3.254% on 12 Jul, before declining to 3.196%, 0.9bps higher than the previous week.

▪ MGS/GII yields began the week higher following reports that Malaysia’s daily vaccination rate breached 400.0k doses. However, by mid-week demand for bonds strengthened as COVID19 infections rose to record highs and as UST yields declined.

▪ Domestic yields may move rangebound this week as risk-off sentiment remains, amid persistently high local COVID-19 cases. Nevertheless, Malaysia’s rising vaccination rates may begin to lift yields in the coming weeks. In the medium to long-term, we still expect yields to return to an uptrend, as lockdown restrictions are eased in line with the National Recovery Plan.

▪ Despite foreign inflows for Asian bonds soaring to a two year high in June, foreign demand for Malaysian debt is expected to remain pressured in the near-term. This is due to persistently high local COVID-19 cases, ongoing MCO measures, and political uncertainties. However, in the medium-term we expect foreign inflows to return as lockdown measures are eased. Additionally, yield differentials remain attractive, with the 10Y MGS-UST spread rising to 190.6bps (previous week: 182.8bps)

Auction Results (15-July)

▪ The 15Y GII 07/36 reopened at RM4.5b, of which RM2.0b was privately placed, and was awarded at an average yield of 3.982%.

▪ As expected, demand was strong with a bid-to-cover (BTC) ratio of 3.056x (YTD average: 2.219x), amid elevated risk-off sentiment.

▪ The next auction is a reopening of the 5Y MGS11/26, with an estimated total issuance of RM3.5b and no private placement.

United States Treasuries (UST)

▪ UST yields were mixed last week, moving between -7.0bps to 3.5bps overall. The 10Y UST initially rose 5.7bps to 1.417% on 13 Jul, before plummeting and closing the week lower at 1.29%, its lowest level since February.

▪ Demand for UST was strong last week, despite the US inflation rate registering 5.4% in June (May: 5.0%), its highest level since 2008. Demand was driven by sustained concerns regarding the COVID-19 Delta variant andUS Fed Chairman Powell’s testimony on 14 Jul, where he continued to argue that high inflation would soon recede, and that the US labour marketrecovery remained at an unsatisfactory level.

▪ Yields will likely remain rangebound this week, fuelled by sustained safe-haven demand for UST. Nevertheless, we still expect yields to return to an uptrend in the medium-term, given the US’s strong economic recovery, rising vaccination rates and the US Fed potentially tapering its quantitative easing programme.

Ringgit Outlook

▪ MYR continued to weaken against the USD last week, reaching its lowest level since July 2020, and we expect it to trade in a tight range between 4.19 and 4.21 this week. On the other hand, our technical model suggests the MYR may rebound slightly to 4.198 this week. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 19 Jul 2021