Government Debt Trend and Flows

▪ MGS and GII yieldsdeclinedlast week, moving between -18.8bps to -5.3bps across the curve. The 10Y MGS yield fell by 13.9bps to 4.191%, its lowest level in three weeks.

▪ Domestic bonds saw improved demand this week, as investors digested the Fed’s recent rate hike and shifted to concerns of a possible global recession amid very strong monetary policy tightening worldwide. MGS/GII yields were also steered by a sizeable decline in US Treasury yields and surprisingly strong demand for the 15Y MGS auction.

▪ We expect yields to trend rangebound-to-lower this week, with bonds remaining well bid from renewed safe-haven demand. However, yields may return to an uptrend should the US PCE Price Index surprise on the high side.

▪ Foreign demand for local bonds may be pressured in June due to the US Fed’s larger-than-expected rate hike. However, this may be somewhat alleviated following the recent return of safehaven demand for bonds amid global recession fears. Nonetheless, we still expect demand to worsenin July,as theFed continues to raise rates and with RM19.0b worth of domestic government bonds maturing.

Auction Results (June-22)

▪ The 15Y MGS 4/37 reopened at a smaller-than-anticipated RM4.5b, with no private placement, and was at an average yield of 4.155%.

▪ Demand was significantly stronger-than-expected, recording a bid-to-cover (BTC) ratio of 3.133x, above our estimate of 1.8x – 2.0x. This may be due to market concerns over a potential global recession and the higher yield environment following weeks of uptrend.

▪ The next auction is a reopening of the 30Y MGS 6/50, and we expect an issuance of RM4.0b with private placement.

United States Treasuries (UST)

▪ UST yields declined this week, particularly along the short-end and middle of the curve, moving between -20.2bps to -1.3bps overall. The 10Y UST initially fell by 13.9bps to 3.087%, its lowest level in two weeks, before closing the week at 3.130% (-9.5bps).

▪ Treasury yields fell across the curve, breaking from weeks of sustained uptrend, as the market began to grow concerned about a potential US and global recession. This follows from Chairman Jerome Powell’s statements that the Fed is strongly committed to bringing down inflation, and that the US economy remains strong, but acknowledging that a recession is possible.

▪ Yields may trend rangebound this week as investors await the US Core PCE Price Index for May (June 30). Expect yields to return to an uptrend if the Fed’s preferred inflation measure registers a surprise increase.

Ringgit Outlook

▪ MYR weakened marginally against the USD last week, due to growing global recession fears amid aggressive central bank rate hikes. This week, the ringgit is expected to trade around the 4.40 level as the market awaits statements from Fed speakers. However, a further decline in the US Core PCE Price Index may strengthen the ringgit. Meanwhile, our technical model suggests the MYR may deprecate by 0.02% to 4.404 this week. (

Source: Kenanga Research - 27 Jun 2022