Government Debt Trend and Flows

▪ MGS and GII yields continued to rise last week, increasing between 0.6bps to 7.2bps overall. The 10Y MGS initially rose by 5.7bps to 3.254% on Aug 11, a 4-week high, before closing the week at 3.216% (+1.90bps).

▪ Demand for MGS/GII was initially pressured last week following a better-than-expected IPI figure and a continued rise in UST yields. Nevertheless, demand reverted towards the end of the week on sustained concerns regarding Malaysia’s COVID-19 condition and ahead of the 2Q21 GDP announcement.

▪ Domestic yields will likely fall this week following tepid 2Q21 GDP data, an unimproved COVID-19 situation, and heightened domestic political uncertainty. Given the impact of the prolonged Movement Control Order (MCO), amid a resurgence in COVID-19 cases, we revise down our 2021 GDP forecast range to 3.5 – 4.0%, from 4.0 – 5.0% previously (2020: -5.6%).

▪ Local bonds experienced a heavier foreign fund outflow in July (-RM3.6b; Jun: -RM0.5b), its sharpest drop in 16 months. Foreign demand is expected to remain pressured in the near term due to the dire domestic COVID-19 condition and deteriorating political stability, despite some loosening of MCO restrictions.

Upcoming Auction (17-August)

▪ The 7Y GII 10/28 is scheduled to reopen at a smaller than-expected issuance of RM4.5b with no private placement.

▪ The previous reopening of the 7Y GII registered a solid bid-to-cover (BTC) ratio of 2.196x in February 2021, but we expect weaker demand at this auction given the increasingly cautious market sentiment.

Source: Kenanga Research - 16 Aug 2021