Government Debt Trend and Flows

▪ MGS and GII yields broadly declined last week, moving between - 2.0bps to -0.2bps overall. The 10Y MGS initially fell by 3.3bps to 3.653% on Feb 03, before closing the week at 3.671% (-1.5bps).

▪ MGS and GII yields trended rangebound-to-lower last week on quiet trading activity amid the Chinese New Year holidays. Nonetheless, local yields increased towards the end of the week, prompted by higher global bond yields following the Bank of England (BoE) and European Central Bank (ECB) interest rate decisions.

▪ Yields will likely rise this week, in response to a spike in US Treasury yields last Friday, after US non-farm payrolls came in better-than-expected. Domestic yields may also be lifted by expectations of a strong 4Q21 GDP print, to be released this Friday (Feb 11).

▪ Foreign demand for Malaysian bonds may be pressured in the near-term, as the US Fed looks set to end quantitative easing and raise interest rates in March. Additionally, demand may be impacted by falling bond yield differentials, as the 10Y MGS-UST yield spread declined to 176.3bps at the end of last week (previous: 191.7bps). Nonetheless, we expect foreign inflows to recover moderately in the long-term, as Malaysia likely maintains a relatively strong economic recovery.

Upcoming Auction

▪ The reopening auction of the 5Y GII 09/27 is scheduled for Feb 07, at a larger-than-expected issuance ofRM5.0b with no private placement.

▪ The previous auction of the 5Y GII in September 2021 saw decent demand, recording a bid-to-cover ratio of 2.133x on a RM4.0b issuance. For this auction, we expect demand to be weaker due to the larger issuance and lukewarm market sentiment amid a global bond sell-off.

Source: Kenanga Research - 7 Feb 2022