Government Debt Trend and Flows

▪ MGS and GII yields were mixed last week, moving between - 5.3bps to 8.8bps overall. The 10Y MGS trended rangebound and closed last week 0.5bps higher at 3.221%. Meanwhile, the 30Y MGS declined 5.3bps to 4.237%, and the 7Y GII increased by 8.8bps to 3.164% amid its reopening auction.

▪ Demand for MGS/GII was relatively muted last week, amid persistently high levels of COVID-19 cases and the resignation of Tan Sri Muhyiddin Yassin as the Prime Minister, exacerbating a period of political uncertainty.

▪ Domestic yields may trend rangebound this week, as the market remains cautious in light of the unimproved COVID-19 condition and awaiting further political developments. There is a slight upside bias, as MGS/GII may track a minorincrease in UST yields ahead of the Jackson Hole Economic Symposium on Aug 27.

▪ Foreign demand for Malaysian bonds will likely remain pressured in the near-term due to the domestic COVID-19 condition and lingering political ambiguity. Furthermore, the impact of COVID-19, extended lockdown measures, and political uncertainty has also raised concerns about potential downgrades to Malaysia’s sovereign credit ratings, which may weigh on sentiment and the capital markets.

Auction Results (17-August)

▪ The 7Y GII 10/28 reopened at a smaller-than-expected RM4.5b, with no private placement, and was awarded at an average yield of 3.163%.

▪ As expected, demand was weaker than recent auctions and posted a bid-to-cover (BTC) ratio of 1.98x, below the YTD average BTC of 2.231x.

▪ The next auction is a reopening of the 3Y MGS 06/24, and we estimate an issuance of RM4.5b with no private placement.

United States Treasuries (UST)

▪ UST yields generally declined last week, moving between -6.0bps to 1.7bps overall. The long end of the curve experienced most of the downward pressure with the 30Y UST falling 6.0bps to 1.869%, a 2-week low. The 10Y UST declined by 2.2bps to 1.255%, its lowest level in 3 weeks.

▪ Demand for UST was solid last week,despite the US Fed indicating in the FOMC minutes that tapering was being prepared for later this year. This sustained demand for long-tenure Treasuries may have been partly driven by US retail sales registering weaker-thanexpected in July (-1.1%; Jun: 0.7%), renewing concerns about economic recovery, even as fears of the Delta variant persist.

▪ Yields may rise slightly this week in the lead up to the Jackson Hole Symposium, taking place virtually on Aug 27. The US Fed is expected to continue discussing tapering the USD120.0b monthly bond purchases but is unlikely to make any major policy announcements at this meeting. Nevertheless, lingering concerns about the spread of the Delta variant may cap any rise in UST yields.

Ringgit Outlook

▪ MYR closed slightly weaker against the USD last week as Brent crude oil prices fell and the local COVID-19 condition worsened. The ringgit may continue to depreciate this week if the US Fed indicates a move towards tapering at the Jackson Hole event. However, our technical model suggests the MYR would appreciate marginally against the USD this week, rising 0.04% to 4.237. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 23 Aug 2021