Government Debt Trend and Flows

▪ MGS and GII yields increased last week, rising between 1.6bps to 24.3bps overall. The 10Y MGS yield surged by 24.0bps to 3.619%, its highest level since July 2019.

▪ The domestic bond sell-off was driven by rising global bond yields, regional worries regarding the Evergrande debt crisis, and local bond supply concerns, made evident by the weak auction of the 7Y MGS. Furthermore, there have been inflation concerns as Brent crude oil surged above USD80.0/barrel.

▪ Domestic yields will likely continue its uptrend this week, on the back of higher UST yields, the further relaxation of domestic restriction measures, and sustained local bond supply concerns. The expectation that the US Fed will announce tapering in November will also drive yields higher in the medium-term.

▪ Foreign demand for local bonds moderated in September, amid a global bond sell-off as major central banks turned hawkish. As such, we expect the Malaysian debt market to receive softer inflows in the near term, especially ahead of the US Fed’s tapering announcement. However, local bonds may continue to find some support from the further reopening of the economy and the increasingly attractive yield differentials; the 10Y MGSUST yield spread rose to 200.7bps last week (previous: 191.1bps).

Auction Results (06-Oct)

▪ The 7Y MGS 06/28 reopened at a slightly larger-than-expected size of RM4.5b, with no private placement, and was awarded at an average yield of 3.409%.

▪ Demand was weak, on the back of a global bond sell-off and rising UST yields, registering a bid-to-cover (BTC) ratio of 1.598x (YTD average: 2.191x).

▪ The next auction is a reopening of the 30Y GII 11/49 and we estimate a total issuance of RM4.0b including private placement.

Source: Kenanga Research - 11 Oct 2021