Government Debt Trend and Flows

▪ MGS and GII yields increased across the curve last week, moving between 2.0bps to 8.5bps overall. The 10Y MGS rose by 7.7bps to 3.621%, its highest level since July 2019.

▪ Demand for sovereign bonds was pressured amid a sustained rise in global bond yields, as major central banks indicate monetary policy normalisation, and on heavy inflationary pressure as crude oil breached the USD85.0/barrel level.

▪ Domestic yields may continue its uptrend this week, ahead of the tabling of Budget 2022, on higher global bond yields, and on the back of a pick-up in domestic inflation. The headline inflation figure increased to 2.2% in September (Aug: 2.0%) and is expected to continue rising amid the release of pent-up demand.

▪ Foreign demand for local bonds will likely remain soft in the near term, amid a global bond sell-off and ahead of the Fed’s expected tapering announcement in November. However, domestic bonds should find some support from the tabling of Budget 2022 and attractively high yield differentials; the 10Y MGS-UST yield spread increased slightly to 198.9bps (previous: 197.4bps).

Auction Results (21-Oct)

▪ The 5Y MGS 11/26 reopened at a slightly larger-than-expected size of RM4.5b, with no private placement, and registered an average yield of 3.209%.

▪ Demand was decent, registering a bid-to-cover (BTC) ratio of 2.042x, but was below the YTD average BTC of 2.196x.

▪ The next auction is a reopening of the 10Y GII 10/30, and we estimate a total issuance of RM5.0b, including private placement.

United States Treasuries (UST)

▪ UST yields increased across the curve last week, moving between 2.7bps to 7.5bps overall. The 10Y UST initially rose by 13.1bps to 1.701% on Oct 22, its highest level since April, before closing the week at 1.632% (+6.2bps).

▪ Treasuries were pressured last week, amid growing risk-on sentiment following the stronger-than-expected US retail sales data. UST yields also rose particularly after initial jobless claims continued to decline, reaching 290.0k for the week ending Oct 16 (previous: 296.0k). However, yields dipped slightly at the end of the week on possible bargain hunting demand and as investors digested the jobless claims data.

▪ We expect UST yields to continue rising this week, driven by the sustained expectation of a Fed taper announcement in November and by strong global inflationary pressures.

Ringgit Outlook

▪ MYR strengthened against the USD for the fourth consecutive week. We expect the ringgit to continue strengthening this week, moving below the 4.15 level amid the tabling of Budget 2022. On the other hand, our technical model suggests the MYR could depreciate by 0.18% to 4.158 this week. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 25 Oct 2021