Government Debt Trend and Flows

▪ MGS and GII yields mostly decreased this week, moving between -15.3 bps to 3.8 bps overall. The 10Y MGS yield turned slightly higher to 3.754% (+3.8 bps) after plummeting last week, while the 5Y MGS yield fell to 3.504% (-15.3 bps) by yesterday ahead of its auction.

▪ Yields mostly remained on a downtrend, amid the shorter workweek, as markets continued to digest BNM’s surprise rate decision. However, local yields turned higher yesterday, likely in response to higher global bond yields.

▪ Domestic yields may return to an uptrend over the next week, as US Treasury yields increase due to the robust US GDP reading and ahead of the US FOMC meeting (Jan 31–Feb 1).

▪ Foreign demand for domestic bonds appears to be improving as global risk-aversion subsides, probably due to expectations of a smaller US rate hike and less hawkish Fed. However, we reckon that risk-off sentiment could return should the upcoming US FOMC meeting (Jan 31–Feb 1) result in the Fed reiterating its hawkish stance and signalling several more rate hikes to come. Further along, we expect a more sustained recovery of foreign demand from 2Q23 onwards, after major central banks complete their tightening cycles.

Upcoming Auction

▪ Today’s auction will be a new issue of the 5.5Y GII 7/28, replacing the 5Y GII 9/27 as the new benchmark; it will have an issuance size of RM5.0b with no private placement, as expected.

▪ The previous auction of the 5Y GII in June 2022 saw huge demand, recording a bid-to-cover (BTC) ratio of 3.133x amid a smaller issuance of RM4.5b. For this auction, we expect solid demand given the nascent recovery in global risk sentiment, and estimate a BTC ratio of between 2.2x – 2.4x.

Source: Kenanga Research - 27 Jan 2023