Government Debt Trend and Flows

▪ MGS and GII yields fell this week, moving between -9.8 bps to -2.7 bps overall. The 10Y MGS yield decreased by 9.5 bps to 3.703%, its lowest level in two weeks, whilst the 3Y MGS yield decreased by 3.1 bps to 3.398%.

▪ Domestic yields were steered by a sharp decline in global bond yields following the resolution of the US debt ceiling impasse. Sovereigns may have also benefitted from domestic safe-haven demand after May’s Manufacturing PMI fell to 47.8 (Apr: 48.8), raising some concerns over declining demand and Malaysia’s growth outlook.

▪ We expect domestic yields to trend slightly lower next week, as US Treasury yields continue to fall and on a potential return of foreign interest in local bonds.

▪ Foreign demand for domestic bonds may remain relatively tepid in the near-term, amid some risk aversion ahead of the US FOMC meeting but should show signs of improvement following progress on the US debt ceiling. Govvies will also find support from improving yield differentials against developed market bonds, with the 10Y MGS-UST spread returning to positive territory this week (10.8 bps; previous week: -1.9 bps).

Auction Results (30-May)

▪ The 15Y MGS 6/38 reopened at a slightly smaller-than-expected RM4.5b, of which RM1.5b was privately placed, and was awarded at an average yield of 4.023%.

▪ The RM3.0b auction recorded a bid-to-cover (BTC) ratio of 2.201x on solid bargain-hunting demand amid higher yields and recent selling pressure for government bonds broadly.

▪ The next auction is a reopening of the 3Y GII 9/26 and we estimate an issuance of RM5.0b with no private placement.

Source: Kenanga Research - 2 Jun 2023