Government Debt Trend and Flows

▪ MGS and GII yields fell this week, moving between -10.2 bps to -2.2 bps overall. The 10Y MGS yield decreased by 5.9 bps to a two-week low of 3.827%.

▪ Domestic bonds were buoyed by a sharp decline in global bond yields following encouraging US inflation data. Meanwhile, foreign portfolio inflows into the Malaysian bond market rose in June (RM5.2b; May: RM3.0b), despite tepid risk sentiment and relatively low domestic bond yields against many developed market counterparts.

▪ We expect local yields to trend rangebound-to-lower next week, mainly steered by UST performance given the lack of domestic catalysts.

▪ Given the surprisingly resilient foreign inflows so far this year, we reckon that foreign demand for domestic bonds will sustain in July. Malaysian sovereigns may continue to benefit from portfolio outflows from China triggered by its uneven recovery and strained relationship with the US. Furthermore, despite relatively narrow yield differentials against developed market bonds, Malaysian govvies still provide attractive returns when hedged against a weak ringgit. Foreign investors may also be attempting to secure peak MGS/GII yields given that BNM has likely completed its policy normalisation and rates are expected to decline. In the longterm, we anticipate foreign demand to gather even more momentum, as the Fed reaches the end of its tightening cycle.

Auction Results (13-July)

▪ The 10Y MGS 11/33 reopened at a much larger-than-expected RM5.5b, with no private placement, and was awarded at an average yield of 3.860%.

▪ Demand was exceptionally strong, recording the largest bid-to-cover ratio (2.641x) since February, despite the notably large auction size. This contrasts with the previous reopening of the 10Y MGS, in March, which saw weak demand on a RM4.5b issuance, recording a bid-tocover ratio of just 1.670x.

▪ The next auction is a reopening of the 7Y GII 9/30 and we estimate an issuance of RM5.0b with no private placement.

Source: Kenanga Research - 14 Jul 2023