Government Debt Trend and Flows

▪ MGS and GII yields mostly declined last week, moving between -9.6bps to 1.2bps overall. The 10Y MGS fell by 9.6bps to 4.053%, its lowest level in 3-months, whilst the 3Y MGS yield increased by 1.2bps to 3.488%.

▪ Demand for domestic bonds remained solid last week,as global bond yields continued to fall and the 10Y GII auction saw very strong bids. This comes amid a hotter-than-expected US inflation print, which has raised concerns of a global recession that may be triggered by even more aggressive US Fed tightening.

▪ Domestic yields may trend rangebound-to-lower this week, as we may see sustained safe-haven demand for bonds interspersed with profit-taking.

▪ Foreign demand for local bonds will likely remain pressured in July, as the hotter-than-expected US CPI print guarantees at least another 75bps rate hike by the Fed, global risk-off sentiment persists on growing recession concerns, and as RM19.0b worth of domestic bonds are scheduled to mature this month.

Auction Result (14-July)

▪ The 10Y GII 10/32 reopened at a larger-than-expected RM6.0b, of which RM2.5b was privately placed, and was awarded at an average yield of 4.117%.

▪ Demand was considerably stronger-than-expected despite the larger issuance, recording a bid-to-cover (BTC) ratio of 3.105x compared to our estimate of 2.0x – 2.2x. This is likely due to a resurgence in safe-haven demand for bonds as investors pivot away from equities amid growing concerns of recession.

▪ The next auction is a reopening of the 20Y MGS, and we estimate an issuance of RM5.0b with private placement.

Source: Kenanga Research - 18 Jul 2022