Government Debt Trend and Flows

▪ MGS and GII yields mostly decreased this week, moving between -11.3 bps to 0.7 bps overall. The 10Y MGS yield initially rose by 0.5 bps to 3.916% on Apr 3, before falling to 3.857% by yesterday (-5.4 bps).

▪ Domestic bond yields may have declined in response to a sharp downturn in Treasury yields, amid concerns over a deeper recession in the US as the labour market appears to have finally deteriorated. With that said, MGS and GII yields remain relatively less correlated to Treasury yields, as BNM’s monetary policy direction is clearer than that of the Fed’s.

▪ Next week, expect domestic bond yields to trend lower, partly steered by the continued decline in US yields amid today’s jobs report and upcoming inflation data. Attention will also be on the reopening auction of the 10Y GII, which is expected to draw better demand than in recent auctions.

▪ We expect sustained foreign inflows into the domestic bond market in the near-term, as markets continue to price in a more dovish Fed and expect rate cuts later this year. Likewise, we reckon demand will be buoyed by foreign investors looking to secure higher returns in Emerging Market assets.

Upcoming Auction

▪ Today’s auction is a reopening of the 10Y GII 10/32 with an issuance of RM4.5b, as expected, and no private placement.

▪ The previous reopening of the 10Y GII drew solid demand, with a bid-to-cover (BTC) ratio of 2.093x in January on a RM4.5b issuance.

▪ We expect similar demand at this auction, buoyed by a potential return of foreign demand and improving market sentiment, with a projected BTC in the region of 1.9x – 2.1x.

Source: Kenanga Research - 7 Apr 2023