Government Debt Trend and Flows

• MGS and GII yields mostly decreased last week, moving between -9.1bps to 7.4bps overall. The 10Y MGS yield fell by 2.1bps to 3.60%, whilst the 3Y MGS yield rose by 7.4bps to 2.697%, flattening the yield curve.
• Demand for sovereign bonds returned last week in the lead up to the tabling of Budget 2022 and on a broad decline in US Treasury yields. However, the 3Y MGS remained pressured likely due to concerns on elevated domestic inflation, following September’s CPI reading of 2.2% (Aug: 2.0%).
• Domestic yields will likely return to an uptrend this week, following the unveiling of an expansionary Budget 2022 and on the US Fed expected to announce its tapering plans.
• Foreign demand for domestic bonds may remain pressured in the near-term, on the back of a global bond sell-off and the Fed’s imminent tapering announcement. However, government bonds may find some support from the expansionary Budget 2022 and rising yield differentials.

Auction Results (28-Oct)

• The 10Y GII10/30reopened at a smaller-than-expected size of RM4.0b, of which RM0.5b was privately placed, and registered an average yield of 3.682%.
• Demand was decent, recording a bid-to-cover (BTC) ratio of 2.018x, but was below the YTD average BTC of 2.191x.
• The next auction is a reopening of the 15Y MGS05/35, and we estimate a total issuance of RM4.0b, including private placement.

United States Treasuries (UST)

• UST yields mostly decreased last week, moving between - 13.6bps to 4.4bps overall. The 10Y UST yield fell by 8.0bps to 1.552%, a two-week low.
• Demand for Treasuries returned last week, causing the yield curve to flatten and especially pressuring the long end of the curve. This comes after the Bank of Canada announced the premature end of its quantitative easing programme, whilst US GDP growth registered weaker-than-expected in 3Q21 at 2.0% (2Q21: 6.7%), and due to broad market volatility ahead of the US FOMC meeting on Nov 2 – 3.
• Nonetheless, we expect UST yields to pick up this week as the Fed will likely announce tapering at their upcoming meeting. Furthermore, the core PCE price index, being the Fed’s preferred inflation measure, remained at 3.6% in September, indicating that US inflationary pressures remained strong.

Monetary Policy & Ringgit Outlook

• At its upcoming FOMC meeting, the Fed is expected to continue its hawkish turn and announce the tapering of its USD120.0b monthly bond purchases. It will likely be reduced at a pace of USD15.0b a month, bringing the Fed’s quantitative easing programme to an end by June 2022, should tapering commence this November.
• BNM is expected to maintain the overnight policy rate at 1.75% during its Nov 3 MPC meeting, on the back of an improving COVID-19 condition and the expansionary Budget 2022. In the long-term, we believe BNM may begin raising the rate by mid-2022 to keep pace with the global normalisation of monetary policy.
• MYR soared to a seven-week high against the USD last week amid improving economic sentiment. However, the ringgit may reverse its gains this week due to the Fed’s expected tapering announcement. This is in line with our technical model which suggests MYR may weaken by 0.19% to 4.148 this week. (Please refer to our Ringgit Weekly Outlook)

Source: Kenanga Research - 1 Nov 2021