Government Debt Trend and Flows

▪ MGS and GII yields mostly increased this week, moving between -3.1 bps to 10.0 bps overall. The 10Y MGS yield increased by 7.7 bps to 3.886%.

▪ Domestic bonds were likely pressured by higher US Treasury yields this week, as markets cemented expectations of further hikes by the Fed. However, yields turned lower yesterday following BNM’s decision to keep the OPR unchanged at 3.00%, raising the likelihood that it has completed its policy normalisation cycle.

▪ We anticipate only a slight uptick in domestic yields next week, despite the sharp rise in UST yields. BNM's decision to maintain the OPR may serve as an anchor for government bonds and mitigate the impact of rising global yields.

▪ Foreign demand for domestic bonds may remain weak in the near-term on heightened global risk-aversion ahead of the upcoming US FOMC meeting (July 25 – 26). Malaysian sovereigns will also face pressure from relatively low yields as developed market yields soar; the 10Y MGS-UST negative yield spread deepened this week (-14.3 bps; previous week: -2.9 bps). That said, we maintain our view that the Fed will keep rates unchanged for the rest of the year as inflation continues to ease and consumer spending shows signs of slowing. Therefore, we still expect foreign inflows into the bond market to strengthen from August onwards, especially if the Fed adopts a dovish tone towards the end of the year.

Upcoming Auction

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

▪ The previous reopening of the 10Y MGS, in March, saw weak demand on a RM4.5b issuance, recording a bid-tocover (BTC) ratio of just 1.670x. We reckon that demand will be tepid for this auction, particularly as global risk sentiment remains poor ahead of the next Fed meeting and as UST yields surge following the strong private payrolls data in the US.

Source: Kenanga Research - 7 Jul 2023