Government Debt Trend and Flows

▪ MGS and GII yields mostly decreased this week, moving between -13.6bps to 4.3 bps overall. The 10Y MGS yield fell by 11.5 bps to 4.175%, its lowest level since September.

▪ Domestic yields trended rangebound for most of the week before turning considerably lower yesterday following the appointment of Datuk Seri Anwar Ibrahim as Malaysia’s 10th

Prime Minister and the confirmation of a unity government led by Pakatan Harapan. This brought domestic yields in line with broadly lower global bond yields.

▪ Yields may continue to fall over the next week as markets react to the positive political catalyst and track lower global bond yields. As a result, we have revised down our end-2022 10Y MGS yield forecast to 4.25% from 4.40% previously.

▪ Foreign demand for Malaysian bonds could rebound in the near-term following the resolution of the domestic political impasse and amid a marked global risk-on turn as markets continue to price in a less hawkish Fed. Downside risks remain in 1Q23 stemming from a widening divergence in BNM-Fed policy rates, but we expect foreign capital flows to chart a strong return from 2Q23 onwards as most major central banks likely complete their tightening cycles.

Upcoming Auction

▪ The next auction is a reopening of the 30Y GII 5/52 and we expect an issuance of RM5.0b including private placement.

▪ The previous reopening of the 30Y GII earlier in May garnered strong demand and a bid-to-cover ratio of 2.570x, but at a relatively small issuance of RM3.0b. For this auction, we expect solid demand despite the potentially larger issuance, driven by renewed optimism following the political breakthrough and the likely return of foreign investors.

Source: Kenanga Research - 25 Nov 2022