Government Debt Trend and Flows

▪ MGS and GII yields decreased across the curve last week, moving between -8.3bps to -1.4bps. The 10Y MGS declined 2.7bps to 3.188%, its lowest level in 4 weeks.

▪ Demand for MGS/GII was solid last week, following a fall in UST yields the previous week, in anticipation of the US jobs report, and amid a strong reopening auction for the 20Y GII. Additionally, government bonds likely remained supported by risk-off demand due to the persistently high levels of domestic COVID-19 cases.

▪ Domestic yields may continue to fall this week, tracking an expected decline in UST yields, following weak non-farm payrolls data, and ahead of the Monetary Policy Committee meeting, where BNM will likely stand pat on the policy rate. In the medium to long-term, we expect domestic yields to return to an uptrend as local restrictions are eased further and as the US Fed possibly commences tapering at the end of the year.

▪ Foreign demand for domestic bonds may remain slightly pressured in the near-term, due to the local COVID-19 condition. However, the probability of bond inflows returning in the coming months has increased, given improving domestic political stability and as yield differentials remain attractive, with the 10Y MGS-UST spread at 186.6bps.

Auction Results (02-September)

▪ The 20Y GII 09/41 reopened at a larger-than-expected RM4.5b, of which RM2.0b was privately placed, and was awarded at an average yield of 4.178%.

▪ Demand was strong, with a bid-to-cover (BTC) ratio of 2.687x, above the YTD average BTC of 2.238x.

▪ The next auction is a reopening of the 10Y MGS 04/31, and we estimate an issuance of RM5.0b including private placement.

United States Treasuries (UST)

▪ UST yields were mixed last week, moving between -1.6bps to 2.5bps overall. The 10Y USTincreased by 1.5bps to 1.322%, while the 2Y UST declined by 0.9bps to 0.206%.

▪ Demand for UST was pressured last week ahead of the release of August’s non-farm payrolls data. Additionally, Treasury yields moved higher following hawkish comments by the European Central Bank, after eurozone inflation rose to its highest level in almost a decade (3.0%; Jul: 2.2%). Yields also continued to rise on Sep 3, despite a weaker-than-expected US jobs report.

▪ Yields may decline this week, amid renewed concerns regarding the US labour market. Non-farm payrolls registered 235.0k in August (Jul: 1053.0k), far below market expectations of 750.0k and the lowest level in 7 months. Fears concerning the Delta variant and resurgence in COVID-19 cases may have deterred people from searching for employment and companies from hiring.

Monetary Policy & Ringgit Outlook

▪ Bank Negara Malaysia is expected to maintain the overnight policy rate at 1.75%, at the 5th Monetary Policy Committee meeting later this week (Sep 9).

▪ MYR continued to strengthen against the USD last week, reaching an 11-week high. The ringgit is expected to trade rangebound between 4.14 – 4.16, with an upside bias, against the dollar this week. However, our technical model suggests the MYR may slightly weaken this week, falling 0.32% against the USD. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 6 Sept 2021