Government Debt Trend and Flows

▪ MGS and GII yields mostly decreased this week, moving between -10.0 bps to 1.8 bps overall. The 10Y MGS yield fell by 5.0 bps to 3.691%, its lowest level since March 2022.

▪ Government bonds drew decent demand this week following a much better-than-expected IPI print for March of 3.1% (Consensus: 0.7%; Feb: 3.5%) and in the lead up to the 1Q23 GDP release later today; we expect growth to ease to 5.1% (4Q22: 7.0%) but to have remained supported by strong domestic demand.

▪ We expect domestic yields to trend lower next week, steered by a probable decline in global yields and a potentially solid domestic growth reading.

▪ Foreign demand is expected to remain subdued in the nearterm, as a result of heightened risk aversion following the Fed’s recent rate hike, coupled with the ongoing debt ceiling and banking crisis in the US. Nevertheless, we still anticipate stronger foreign inflows in 2H23, given the possible completion of the Fed’s tightening cycle and the potential for rate cuts towards the end of the year, especially if the US falls into a deeper recession. Additionally, domestic bonds remain relatively attractive against developed market counterparts due to positive yield spreads and should receive further support from BNM’s recent rate hike.

United States Treasuries (UST)

▪ UST yields increased this week, moving between 0.6 bps to 10.9 bps overall. The 10Y UST yield initially rose by 14.0 bps to 3.519% on May 9, before falling to 3.384% by yesterday.

▪ US bond yields trended significantly higher early this week ahead of the latest inflation figures and on the back of last Friday’s stronger than expected jobs data; US Non-Farm Payrolls added 253.0k jobs in April (Consensus: 180.0k; Mar: 165.0k). However, yields retreated following the softer-thanexpected headline and core inflation for April, registering 4.9% (Mar: 5.0%) and 5.5% (Mar: 5.6%), respectively. The inflation data in particular has led to heightened expectations that the Fed will pause rate hikes and may consider cuts later this year; Fed Funds Futures now indicate a 48.9% probability of a 25 bps rate cut in September.

▪ US yields may decline this week on strong risk aversion as the debt ceiling crisis remains unresolved. Demand for bonds may also be driven by signs of cooling inflation and potential softening in the labour market; Initial Jobless Claims for the week ending May 6 rose to 264.0k (Previous week: 242.0k)

Source: Kenanga Research - 12 May 2023