Government Debt Trend and Flows

▪ MGS and GII yields declined last week, moving between - 13.8bps to -0.6bps overall. The 10Y MGS yield fell by 7.5bpsto a 6-week low of 4.149%.

▪ Demand for domestic bonds improved last week, steered by the recently falling global bond yields and following the expected 25bps rate hike by BNM. Nonetheless, the bond market recorded its largest net foreign outflow in over 2-years in June, as foreign demand was impacted by the US Fed’s aggressive tightening and global risk-aversion.

▪ Domestic yields will likely return to an uptrend this week on the back of higher US Treasury yields following a strong US jobs report. Likewise, expect yields to trend even higher should US inflation register higher-than-expected on July 13.

▪ We expect bond outflows to worsen in July, as the Fed potentially raises rates by another 50 – 75 bps, global risk-off sentiment intensifies on recession concerns, and as RM19.0b worth of domestic bonds are scheduled to mature. Furthermore, the 10Y MGS-UST yield spread continues to narrow (107bps; previous week: 134bps), making local bonds less attractive to foreign investors.

Upcoming Auction

▪ The upcoming auction is a reopening of the10Y GII on 10/32, and we expect an issuance of RM5.0b with private placement.

▪ The previous reopening of the 10Y GII in April saw strong demand on a RM4.5b issuance, registering a bid-to-cover (BTC) ratio of 2.503x. For this auction, we expect slightly weaker demand and a BTC of between 2.0x – 2.2x on a larger expected issuance and frailer market sentiment.

Source: Kenanga Research - 12 Jul 2022