Government Debt Trend and Flows

▪ MGS and GII yields fell this week, moving between -15.5 bps to -2.1 bps overall. The 10Y MGS yield decreased by 10.8 bps to 3.91%.

▪ Demand for government bonds improved in response to intense market disorder in the US, which saw a rush towards the safety of short-term govvies globally. Likewise, the lower yields may have also been prompted by a weaker IPI print for January (1.8%; Dec: 2.8%), caused by slowing manufacturing output and poor external demand.

▪ Domestic yields may trend rangebound-to-higher next week, as global bond yields potentially rise ahead of the Fed meeting and some optimism over the stabilisation of the US banking sector.

▪ The current banking crisis in the US will further exacerbate global risk-aversion, which was already mounting due to hawkish signals from the Fed, leading to potential outflows from the domestic bond market in March. Nevertheless, foreign inflows could potentially recover from 2Q23, contingent on the Fed signalling the end of its tightening cycle and the stabilisation of the US financial sector.

Auction Results (14-Mar)

▪ The 7Y GII 9/30 reopened at a larger-than-expected issuance of RM5.0b, with no private placement, and was awarded at an average yield of 3.792%.

▪ Demand remained weak, registering a bid-to-cover (BTC) ratio of 1.586x on a relatively large issuance size; possibly due to worsening global risk sentiment amid the banking crisis in the US, although domestic investors did not rush to buy government bonds.

▪ The next auction is a reopening of the 30Y MGS 3/53 and we estimate an issuance of RM5.0b including private placement.

Source: Kenanga Research - 17 Mar 2023