Government Debt Trend and Flows

▪ MGS and GII yield movements were mixed last week, moving between -13.9bps to 6.7bps overall. The 10Y MGS yield initially fell by 9.7bps to 4.387%, before closing the week at 4.422% (- 3.2bps). Meanwhile, the 3Y MGS yield declined by 13.8bps to 3.668%, steepening the yield curve.

▪ Domestic yields initially trended lower at the beginning of the week, ahead of the BNM’s MPC meeting and a steady decline in US Treasury yields. However, yields began to rise following BNM’s surprise 25bps rate hike on May 11. Furthermore, the local bond market recorded a second consecutive month of foreign fund outflows in April (-RM2.2b), albeit to a lesser extent than in March.

▪ We expect yields to trend rangebound this week, steered by Malaysia’s robust 1Q22 GDP print (5.0%), BNM’s earlier-than-expected rate hike, and potentially lower US Treasury yields.

▪ Foreign demand for local bonds will likely remain pressured in the near-term, as the US Fed continues to tighten monetary policy. However, we expect a smaller net outflow of foreign funds in May, as there are no scheduled MGS or GII maturities this month and following BNM’s recent OPR hike.

Auction Results (12-May)

▪ The 30Y GII 05/52 was newly issued at a smaller-than-expected size of RM3.0b, of which RM0.5b was privately placed, and was awarded at an average yield of 5.357%.

▪ Demand was very strong, given the smaller auction size and relatively high yield levels; recording a bid-to-cover (BTC) ratio of 2.570x.

▪ The next auction is a reopening of the 10Y MGS 07/32, and we expect an issuance of RM4.5b with no private placement.

United States Treasuries (UST)

▪ UST yields declined across the curve, moving between - 21.9bps to -13.2bps overall. The 10Y UST fell by 20.8bps to 2.919%, its lowest level in two weeks.

▪ Treasury yields declined after two weeks of steady uptrend, likely due to investors returning to the safety of bonds following a strong US equity sell-off. This comes despite US CPI data for March registering higher than anticipated at 8.3% (consensus: 8.1%), although the reading indicated that inflation may have reached a peak.

▪ Yields may trend rangebound-to-lower this week, as investors await speeches from several Fed officials, including Chairman Jerome Powell, to ascertain the Fed’s monetary policy direction. Demand for UST may also strengthen as the market pivots away from equities into bonds, amid relatively attractive yield levels.

Ringgit Outlook

▪ MYR continued to weaken against the USD last week as the USD index climbed above the 104.0 level amid a hotter-than-expected US CPI reading. This week, the ringgit may continue to trade near the 4.40 level and will mainly be influenced by Fed Chair Powell’s scheduled speech and the direction of the yuan. On the other hand, our technical model continues to suggest the MYR may strengthen by 0.28% against the USD. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 17 May 2022