Government Debt Trend and Flows

▪ MGS and GII yields remained mixed last week, moving between -6.8bps to 3.4bps overall. The 10Y MGS initially fell 9.3bps to 3.103%, a 2-month low, before closing the week at 3.128% (previous: 3.196%).

▪ Demand for MGS/GII remained relatively strong last week, driven by risk-off sentiment amid persistently high domestic COVID-19 cases, and tracking a sustained decline in UST yields. Bonds were also supported by Fitch Ratings’ reaffirmation of Malaysia’s long-term foreign-currency rating at “BBB+” with a stable outlook.

▪ Domestic yields will likely fall this week, driven by sustained riskoff sentiment as Malaysia registered a record 17k new COVID-19 cases on Sunday (25 July). Nevertheless, in the medium to longterm, we expect yields to return to an uptrend given Malaysia’s rising vaccination rate and as lockdown measures are eased.

▪ Amid the worsening domestic COVID-19 condition, ongoing lockdown restrictions, and lingering political uncertainty, we expect foreign demand for Malaysian debt to remain pressured in the near-term. However, local bonds will likely be supported by Fitch’s reaffirmation of Malaysia’s sovereign rating, and we expect foreign inflows to return in the medium-term as MCO measures are relaxed.

Auction Results (22-July)

▪ The 5Y MGS 11/26 reopened at RM5.0b, with no private placement, and was awarded at an average yield of 2.616%.

▪ Demand was weak amid a larger than expected issuance, with a bid-to-cover (BTC) ratio ofjust1.505x (YTD average: 2.185x), the lowest this year.

▪ The next auction is a reopening of the 10Y GII 10/30, with an estimated total issuance of RM4.5b including private placement.

United States Treasuries (UST)

▪ UST yields decreased across the curve last week, moving between -6.2bps to -0.4bps overall. The 10Y UST initially plunged 10.2bps to 1.189% on 19 July, a 5-month low, before closing the week at 1.276% (previous: 1.29%).

▪ Demand for UST remained strong last week amid concerns about the rapid spread of the Delta COVID-19 variant, which has clouded the US’s economic outlook. However, this position partly reversed by mid-week with the 10Y UST yield rebounding to nearly 1.3%.

▪ Yields may trend rangebound-to-lower this week, ahead of the US FOMC meeting on Wednesday, and will likely remain pressured in the near-term given the sustained rise of the Delta variant. Additionally, initial jobless claims registered higherthan-expected for the week ended 17 July at 419k (previous: 368k). This suggests that the US labour market recovery remains unstable, which may drive the US Fed to maintain its dovish policy stance.

Ringgit Outlook

▪ MYR continued to depreciate last week, largely due to rising domestic COVID-19 cases. We expected the ringgit to continue declining against the USD this week, however, our technical model suggests it may reverse its downtrend and appreciate slightly by 0.09% to 4.223. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 26 Jul 2021