Government Debt Trend and Flows

▪ MGS and GII yields mostly increased this week, moving between -0.6 bps to 3.8 bps overall. The 10Y MSG yield initially increased by 1.0 bps to 3.816% on July 26, before turning lower to 3.800% by yesterday (-0.6 bps).

▪ Domestic bonds were relatively stable despite a broad increase in global bond yields following the Fed’s resumption of rate hikes. Daily trading volume for government bonds fell to RM3.7b so far this week (last week: RM5.6b).

▪ Local bond yields may trend slightly higher next week, steered by the increase in global bond yields after the Fed’s monetary policy decision and the ECB’s 25 bps rate hike, which raised the main policy rate to 3.75%, its highest level in over 22 years.

▪ Foreign demand for domestic bonds may sustain in the near-term, continuing to benefit from some portfolio flows out of China and as foreign investors look to secure peak yields in Malaysia given that BNM has probably completed its policy normalisation. Despite the Fed’s rate hike, global risk sentiment may improve going forward as markets continue to price in potential rate cuts for early next year.

Upcoming Auction

▪ Today’s auction is a reopening of the 3Y MGS 7/26 with a slightly smaller than expected issuance of RM4.5b and no private placement.

▪ The previous reopening of the 3Y MGS, in February, drew weak demand and recorded a bid-to-cover (BTC) ratio of 1.691x at a RM5.5b. We expect demand to be slightly stronger for this auction, given the smaller issuance, but to be largely tempered by cautious risk sentiment amid the Fed’s rate hike.

Source: Kenanga Research - 28 Jul 2023