Government Debt Trend and Flows

▪ MGS and GII yields mostly decreased this week, moving between -3.1 bps to 3.7 bps overall. The 10Y MSG yield fell by 2.2 bps to 3.806%, whilst the 3Y MGS yield decreased by 3.1 bps to 3.377%.

▪ Domestic bonds were steered by lower UST yields for most of this week, following last week’s softer US inflation data, and given the lack of local catalysts.

▪ Domestic yields may trend higher next week, driven by a sharp increase in UST yields and ahead of the US FOMC meeting (July 25 – 26). Should the Fed raise rates by another 25 bps, as widely expected, local yields will likely be steered higher. However, we still expect the Fed to maintain status quo, and we reckon that bond yields will return to a downtrend following the FOMC meeting.

▪ We expect foreign demand for domestic bonds to sustain in the near-term, benefitting from portfolio flows out of China and as foreign investors look to secure peak yields in Malaysia given that BNM has likely finished raising rates. Although domestic yield differentials against developed market bonds are currently negative, Malaysian sovereigns still provide attractive returns when hedged against a weak ringgit. Going forward, we anticipate foreign demand to gather even more momentum, especially if the Fed keeps rates unchanged next week and provides some hints that the tightening cycle was near an end.

Auction Results (20-July)

▪ The 7Y GII 9/30 reopened at RM5.0b with no private placement, as expected, and was awarded at an average yield of 3.788%.

▪ Demand was strong, recording a bid-to-cover (BTC) ratio of 2.295x on a relatively large auction size. Domestic bonds remain well bid in July following last month’s weakness, but investor sentiment will likely be cautious ahead of next week’s US FOMC meeting.

▪ The next auction is a reopening of the 3Y MGS 7/26, and we estimate an issuance of RM5.0b with no private placement.

Source: Kenanga Research - 21 Jul 2023