Government Debt Trend and Flows

▪ MGS and GII yields mostly increased last week, moving between -0.4bps to 3.5bps overall. The 10Y MGS yield rose by 9.1bps to 4.098% on Sep 7, its highest level in two months, before closing the week at 4.040% (+3.3bps).

▪ Demand for domestic bonds remained generally pressured last week as BNM raised rates by another 25bps to 2.50% and as global bond yields trended higher. On the other hand, foreign portfolio inflows returned to the bond market in August, recording the largest net inflow in eight months (RM5.6b; Jul: -RM3.5b).

▪ Domestic yields may trend rangebound-to-lower this week, as the market settles following BNM’s recent rate hike and looks ahead to the next US FOMC meeting (Sep 20 – 21).

▪ Foreign demand may be slightly pressured in September, following the return of global risk-aversion, amid the Fed’s continued hawkish stance, and due to falling MGS-UST yield differentials; the 10Y MGS-UST yield spread fell to 73.0bps last week (previous week: 81.8bps). However, we still expect bond inflows to improve in 4Q22, on fewer government bond maturities, further BNM rate hikes, and as the pace of Fed hikes ease.

Upcoming Auction

▪ The next auction is a reopening of the 3Y GII 10/25, and we estimate an issuance of RM5.0b with no private placement.

▪ The previous reopening of the 3Y GII on May 30 recorded a surprisingly large bid-to-cover ratio of3.632x on a RM5.0b issuance, amid a period of strong safe-haven demand for bonds at the time. For this auction, we expect more tempered demand following the return of global risk aversion and rising bond yields.

United States Treasuries (UST)

▪ UST yields increased last week, rising between 8.9bps to 17.3bps overall. The 10Y UST yield initially rose by 16.0bps to 3.349% on Sep 6, its highest level in three months, before closing the week at 3.310% (+12.0bps)

▪ Treasuries continued to be sold off last week as investors anticipate a hawkish move by the Fed, with Fedb Funds futures implying around a 90% chance of another 75bps rate hike. However, yields moved slightly lower midweek after the Fed’s Beige Book revealed that US growth outlook remained weak. Meanwhile, the ECB raised rates by a historic 75bps to tame inflation, sending several European bond yields higher but leaving UST yields mostly unchanged.

▪ Yields may trend rangebound-to-lower this week with heightened volatility, as investors digest a potentially lower US inflation rate for August (consensus: 8.0%; Jul: 8.5%). However, should inflation surprise on the high side, expect yields to return to an uptrend ahead of the upcoming US FOMC meeting.

Ringgit Outlook

▪ The MYR continued to weaken against a broadly strong USD last week, despite rate hikes by BNM and the ECB. This week, the ringgit may reverse some of its losses against the dollar on expectations of a softer US inflation reading for August, ongoing ECB hawkishness, and improving investor sentiment as evidenced by a decline in the CBOE volatility index. Likewise, our technical model suggests the MYR may appreciate marginally by 0.01% to 4.497 against the USD. (Please refer to our Ringgit Weekly Outlook report)

Source: Kenanga Research - 12 Sept 2022