Government Debt Trend and Flows

▪ MGS and GII yields mostly increased last week, moving between - 0.5bps to 8.7bps overall. The 10Y MGS rose 4.3bps to 3.171%, its highest level in two weeks.

▪ Demand for MGS was pressured last week following the sizeable auction of the 10Y GII, which drew strong demand and was awarded at a relatively high average yield. The reconvening of parliament, and confirmation of the end of the COVID-19 state of emergency, also likely contributed to the rise in yields.

▪ Domestic yields may move sideways this week, as cautious sentiment remains given Malaysia’s worsening COVID-19 condition. In the medium-term, yields will still likely return to an uptrend as vaccination momentum continues and Movement Control Order measures are relaxed in line with the National Recovery Plan.

▪ The persistently high level of COVID-19 cases and ongoing lockdown measures will likely supress foreign demand for Malaysian bonds in the near-term. However, local bonds may find some support from the recent sitting of parliament and the end of Malaysia’s state of emergency. In the medium-term we expect foreign inflows to return, driven by increasingly attractive yield differentials; the 10Y MGS-UST yield spread stands at 194.9bps (previous: 185.2bps)

Auction Results (29-July)

▪ The 10Y GII 10/30 reopened at RM5.5b, of which RM2.0b was privately placed, and was awarded at an average yield of 3.286%.

▪ Demand was very strong with a bid-to-cover (BTC) ratio of 3.403x, the highest this year, and significantly higher than the recent auction of the 5Y MGS with only 1.505x.

▪ The next auction is a reopening of the 30Y MGS06/50, with an estimated total issuance of RM4.0b including private placement.

United States Treasuries (UST)

▪ UST yields continued to decrease across the curve last week, moving between -5.4bps to -1.4bps overall. The 10Y UST yield declined for the fifth consecutive week, falling 5.4bps to 1.222%.

▪ Demand for UST remained strong last week amid the US FOMC meeting and weaker-than-expected readings for GDP and jobless claims. Yields continued to fall after the Fed failed to provide a timeline for tapering its USD120.0b monthly bond purchases. Additionally, the US recorded 6.5% GDP growth in 2Q21 (1Q21: 4.3%), below market forecasts of 8.5%. Finally, US initial jobless claims improved at 400.0k for the week ending July 24 but remained above market expectations of 380.0k.

▪ Yields may trend rangebound-to-higher this week, following persistently high inflation readings. The personal consumption expenditures price index increased 3.5% YoY in June (May: 3.4%) but was slightly softer than market expectations of 3.6%. Nevertheless, concerns regarding the spread of the Delta variant may continue to supress yields.

Monetary Policy & Ringgit Outlook

▪ The US Fed kept the federal fund rate target near zero at last week’s FOMC meeting, as expected. It acknowledged that the US economy continues to recovery despite persistent pandemic concerns, but that a rate hike is nowhere being considered. Nevertheless, we believe the Fed has started its tapering clock, and may be considering scaling back its USD120.0b monthly bond purchases in 4Q21 or 1Q22.

▪ MYR rebounded against the USD by end of last week, following Chairman Powell’s dovish comments, higher Brent crude oil price and lower UST yields. We expect the ringgit to weaken around the 4.23 – 4.25 level this week, in line with our technical model, which suggests a depreciation of 0.20% against the greenback. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 2 Aug 2021