Government Debt Trend and Flows

▪ MGS and GII yields fell this week, moving between-11.2bps to -4.1 bps overall. The 10Y MGS yield initially decreased by 9.9 bps to 3.988% on Jan 4, before turning slightly higher to 4.006% yesterday (-8.1 bps).

▪ Local bonds rallied following the turn of the New Year, with yields trending lower as expected, driven by falling global bond yields and a rebound in trading volume as investors returned to the market. The average daily trading volume for government bonds recovered to RM3.7b over thepast week (previous week: RM1.6b).

▪ Domestic yields may remain on a downtrend next week, continuing to be steered by US Treasury yields. Focus will be on the release of US inflation data for December (Jan 12), with markets expecting cooler headline inflation (Consensus: 6.6%; Nov: 7.1%).

▪ The Malaysian bond market may still record mild foreign outflows in 1Q23 on lingering global risk-aversion. However, we expect demand to improve by 2Q23 after most major central banks finish raising rates and for an even stronger return of foreign inflows in 2H23 as markets anticipate possible Fed rate cuts at the end of the year.

Upcoming Auction (6-Jan)

▪ The first auction of 2023 will be the reopening of the 10Y GII 10/32 with an issuance of RM4.5b and no private placement, as expected.

▪ The previous reopening of the 10Y GII registered a relatively weak bid-to-cover (BTC) ratio of 1.739x, on a smaller auction size of RM3.5b, in October 2022. For this auction, we expect similar demand and a BTC ratio of between 1.7x – 1.9x, given cautious market sentiment and the larger issuance.

Source: Kenanga Research - 6 Jan 2023