Government Debt Trend and Flows

▪ MGS and GII yields increased across the curve last week, moving between 0.1bps to 8.9bps overall. The 10Y MGS increased by 2.6bps to 3.197%, its highest level in three weeks.

▪ Demand for MGS/GII remained relatively muted for most of the week, given cautious market sentiment amid Malaysia’s COVID19 condition and political uncertainty. However, domestic yields increased towards the end of the week, on the back of a rise in UST yields following improved US employment data. Additionally, the 30Y MGS yield rose 8.9bps due to its solid auction.

▪ Domestic yields may rise this week in reaction to higher UST yields, but this will likely be capped by prevailing concerns regarding the domestic COVID-19 condition and political uncertainty. Furthermore, a stronger-than-expected IPI or 2Q21 GDP reading this week may also lift yields higher.

▪ Foreign demand for Malaysian bonds will likely remain pressured in the near-term due to the domestic COVID-19 condition and ongoing political ambiguity. However, in the medium-term we expect foreign inflows to return as lockdown measures are eased and as yield differentials remain attractive; the 10Y MGS-UST yield spread stands at 190.0bps (previous week: 194.9bps).

Auction Results (05-August)

▪ The 30Y GII 06/50 reopened at RM4.0b, of which RM2.0b was privately placed, and was awarded at an average yield of 4.289%.

▪ As expected, demand was solid with a bid-to-cover (BTC) ratio of2.28x, close to the YTD average BTC of 2.242x.

▪ The next auction is a reopening of the 7Y GII 08/28, with an estimated total issuance of RM5.0b and no private placement.

United States Treasuries (UST)

▪ UST yields rebounded this week, rising across the curve between 2.4bps to 7.7bps overall. The 10Y UST initially fell to 1.172%, its lowest level since February 11, before closing the week 7.5bps higher at 1.297%, a 3-week high.

▪ Safe-haven demand for UST was initially strong last week amid ongoing fears regarding the Delta variant and lingering growth concerns. However, towards the end of the week yields began to rise due to strong USemployment data. Initial jobless claims met expectations registering at 385.0k for the week ending July 31 (previous: 399.0k). Additionally, non-farm payrolls came in better-than-expected at 943.0k in July (June: 938.0k), its highest level in 11 months, and the unemployment rate fell to 5.4% (June: 5.9%).

▪ Yields may trend rangebound-to-higher this week, driven by the strong US employment data but likely capped by COVID-19 concerns. The 7-day average for daily COVID-19 cases in the US rebounded to over 100.0k, its highest level since February.

Ringgit Outlook

▪ MYR continued to appreciate against the USD last week, and we expect it to trade rangebound between 4.21 –4.23 this week, with a downside bias, amid Malaysia’s COVID19 condition. This is in line with our technical model, which suggests the MYR will depreciate 0.03% against the USD to 4.220 this week. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 9 Aug 2021