Government Debt Trend and Flows

▪ MGS and GII yields mostly fell this week, moving between -6.3 bps to 1.1 bps overall. The 10Y MGS yield increased slightly by 0.8 bps to 3.809%, whilst the 20Y MGS yield decreased by 6.3 bps to 4.143%.

▪ Domestic bonds benefitted from lower global bond yields early in the week and was buoyed by BNM’s statement that it would intervene in the foreign exchange market to stabilise the ringgit.

▪ We expect domestic yields to return to an uptrend next week, as cautious sentiment returns amid surging US Treasury yields and the release of key US inflation data later today.

▪ Foreign demand for domestic bonds may be weak in the near-term amid poor risk sentiment, a weak ringgit, and unattractive yield differentials against developed market bonds; the 10Y MGS-UST yield spread is currently negative (-2.9 bps; previous week: 0.6 bps). Likewise, Fed Chair Jerome Powell continued to signal a hawkish stance following strong US economic data, raising bets of further rate hikes in the coming months. That said, we still believe foreign demand could chart a strong recovery towards the end of 3Q23 after it is certain that the Fed’s hiking cycle is complete.

Auction Results (28-June)

▪ The 5Y GII 7/28 reopened at a larger-than-expected RM5.5b, with no private placement, and was awarded at an average yield of 3.677%.

▪ Demand was good despite the relatively large auction size, recording a bid-to-cover (BTC) ratio of 1.813x. This came off the back of improving domestic and global sentiment with bond yields trending lower earlier this week.

▪ The next auction is a reopening of the 10Y MGS 11/33, and we expect an issuance of RM4.5b with no private placement.

United States Treasuries (UST)

▪ UST yields increased this week, moving between 3.1 bps to 11.3 bps overall. The 10Y UST yield initially fell by 8.7 bps to 3.708% on 28-June, before rebounding to 3.838% yesterday (+4.4 bps).

▪ Treasury yields fell considerably early in the week as markets resisted the Fed’s hawkish guidance. USTs were also likely driven by lower European bond yields as weaker economic data suggested a longer recession; Germany’s Business Climate Index continued to fall in June (88.5; May: 91.5). However, UST yields rebounded yesterday after another round of surprisingly strong economic data fuelled bets of further Fed rate hikes. US 1Q23 GDP growth was revised up to 2.0% from 1.3% (4Q22: 2.6%), whilst Initial Jobless Claims for the week ending 24-June fell sharply (239.0k; previous week: 265.0k), challenging expectations that the US will slide into a recession.

▪ US yields may continue to rise next week on the back of Chairman Powell’s hawkish comments and today’s release of the Fed’s preferred inflation gauge, the Core PCE Price Index for May; the market expects it to remain unchanged at 4.7%.

Source: Kenanga Research - 30 Jun 2023