Government Debt Trend and Flows

▪ MGS and GII yields increased last week, rising between 1.2bps to 10.5bps overall. The 10Y MGS initially rose by 7.8bps to 3.718% on Jan 19, before closing the week at 3.677% (+3.7bps).

▪ MGS and GII yields trended higher last week on sustained concerns regarding the US Fed’s monetary policy direction and ahead of BNM’s MPC meeting. However, yields began to decline slightly by mid-week after BNM maintained a neutral tone and signalled a cautiously optimistic growth outlook, which eased concerns of an early policy rate hike. Additionally, local yields were pulled lower by falling global bond yields as risk aversion permeated global markets.

▪ Yields may trend lower this week, following a heavy decline in US Treasury yields at the end of last week. Nonetheless, Malaysian bonds will likely be sensitive to US Treasury volatility this week ahead of the FOMC meeting and the release of key US economic data.

▪ We expect foreign inflows into the Malaysian bond market to be pressured in the near-term, despite the recent return of foreign inflows, due to the increasingly aggressive US Fed monetary policy tightening. However, in the long-term we reckon inflows will moderately recover, finding support from Malaysia’s ongoing economic recovery and relatively high yields differentials of local bonds.

Upcoming Auction

▪ The upcoming auction is a reopening of the 15Y GII 07/36 and we estimate an issuance of RM3.5b with no private placement.

▪ The previous reopening of the 15Y GII in July 2021 registered a very strong bid-to-cover (BTC) ratio of 3.056x on a relatively small auction size of RM2.5b. We expect robust demand for this auction, with an estimated BTC of between 2.2x – 2.4x, amid a higher yield environment and a potentially modest auction size.

United States Treasuries (UST)

▪ UST yields mostly declined last week, moving between -5.1bps to 3.5bps overall. The 10Y UST yield initially rose by 8.9bps to 1.874% on Jan 18, its highest level in two years, before closing the week significantly lower at 1.758% (-2.6bps).

▪ UST yields began last week on an uptrend, as the market continued to prepare for possibly more aggressive monetary policy tightening by the US Fed. However, towards the end of the week yields declined markedly as risk-off sentiment gained momentum following heavy stock market selloffs and US initial jobless claims rising to 286.0k (previous: 231.0k).

▪ Yields will likely be volatile this week ahead of the US FOMC meeting between Jan 25 – 26, where the Fed may take an even more hawkish stance and clearly indicate a March rate hike to combat soaring inflation levels. Furthermore, several key data releases will likely impact demand for bonds this week, including the US 4Q21 GDP data and the PCE price index in December.

Ringgit Outlook

▪ MYR depreciated slightly against the USD last week, despite rising crude oil prices, BNM’s positive economic outlook, and Malaysia’s stable inflation reading. This week, the ringgit may continue last Friday’s uptrend and trade around the 4.18 level amid falling UST yields. On the other hand, our technical model suggests the MYR may weaken marginally by 0.03% to 4.187 against the USD. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 24 Jan 2022