Government Debt Trend and Flows

▪ MGS and GII yield movements were mixed this week, moving between -4.6 bps to 2.7 bps overall. The 10Y MGS yield increased slightly by 1.0 bps to 3.741%.

▪ Local bond yields initially trended lower at the end of last week, likely steered by a sharp downtrend in global bond yields. However, domestic sovereigns then saw some pressure leading up to BNM’s latest monetary policy meeting and yields spiked following its surprise 25 bps rate hike. The central bank highlighted a positive economic outlook, supported by resilient domestic demand and China’s stronger-than-expected recovery, whilst the risks to inflation remained tilted to the upside.

▪ We expect domestic yields to trend slightly higher next week, driven by the rate hikes by BNM and the Fed. That said, we reckon both central banks have completed their policy normalisation and envisage no further rate hikes.

▪ Foreign demand for domestic bonds may weaken slightly in the near-term as global risk sentiment wanes due to the renewed banking crisis in the US. The banking sector has come under strain once again after US regulators seized First Republic Bank and sold its assets to JP Morgan, with other banks also showing signs of stress. Markets are concerned over a heightened risk of a US recession exacerbated by the regional banking crisis.

Upcoming Auction

▪ The next auction is a reopening of the 7Y MGS 4/30, and we anticipate an issuance of RM5.0b with no private placement.

▪ The previous reopening of the 7Y MGS, earlier in February, saw strong demand and a bid-to-cover (BTC) ratio of 2.460x on a RM5.0b issuance. We expect demand for this auction to be tempered by BNM’s surprise rate hike and weaker global risk sentiment, potentially recording a BTC of between 1.8x – 2.0x.

Source: Kenanga Research - 5 May 2023