Government Debt Trend and Flows

▪ MGS and GII yields mostly increased last week, moving between -0.8bps to 6.0bps across the curve. The 10Y MGS initially increased by 7.2bps to 4.263% on June 30, before closing the week at 4.224% (+3.3bps).

▪ Domestic yields returned to an uptrend last week, despite returning demand seen for other global bonds and the S&P’s upgrade of Malaysia’s sovereign credit outlook to “Stable” from “Negative”. However, demand for local bonds picked up strongly on Friday, perhaps taking cues from its developed market counterparts.

▪ We project MGS/GII yields to trend lower this week, steered by falling US Treasury yields and ahead of BNM’s MPC meeting (July 5 – 6), where we expect the central bank to raise the OPR by another 25bps to 2.25%.

▪ We expect foreign demand for Malaysian bonds to remain pressured in July, as the Fed potentially raises rates by another 50 – 75bps, as RM19.0b worth of domestic government bonds are scheduled to mature, and as concerns over a possible global recession directs demand to traditional safe-havens.

Auction Results (June-29)

▪ The 30Y MGS 6/50 reopened at a larger-than-expected RM5.0b, of which RM2.5b was privately placed, and was at an average yield of 4.959%.

▪ Demand was strong, recording a bid-to-cover (BTC) ratio of 2.459x, as demand for bonds recovered following the recent US FOMC meeting andonburgeoning concerns of a global recession.

▪ The next auction is a reopening of the 10Y GII 10/32, and we expect an issuance of RM5.0b with private placement.

United States Treasuries (UST)

▪ UST yields continued to decline this week, particularly along the short-end and middle of the curve, moving between -30.8bps to -15.4bps overall. The 10Y UST initially increasedby 7.0bps to 3.200% on June 27, before closing the week considerably lower at 2.880% (-25.0bps).

▪ Treasury yields dipped last week as the Core PCE Price Index, the Fed’s preferred inflation measure, came in slightly cooler than expected at 4.7% in May (consensus: 4.8%; Apr: 4.9%). Furthermore, yields saw a sharp decline at the end of the week as the market continued to price in a US recession.

▪ Yields may trend rangebound-to-lower this week, on further safe-haven demand as investors remain concerned about a potential US recession. However, should the US FOMC minutes (July 7) indicate a more aggressive and assured Fed stance on tightening, then yields may return to an uptrend.

Ringgit Outlook

▪ MYR depreciatedmarginally against the USD last week,as the dollar was bolstered by hawkish remarks from the Fed’s Powell. This week, the ringgit may strengthen below the 4.40 level against the dollar, as BNM is expected to raise its policy rate by another 25bps.Likewise, our technical model suggests the MYR may marginally appreciate by 0.06% to 4.405 this week. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 4 Jul 2022