Government Debt Trend and Flows

▪ MGS and GII yields increased this week, moving between 1.7 bps to 8.3 bps overall. The 10Y MGS yield rose by 4.6 bps to a five-week high of 3.879%, whilst the 5Y MGS rose by 8.3 bps to 3.667%.

▪ Domestic bonds have been partly impacted by the prevailing bearish sentiment in the global bond market, reflected in higher yields and weaker auction performance for the 5Y MGS. The sell-off has coincided with a significant increase in daily trading volume so far this week of RM4.4b, compared to the quiet trading period last week prior to the state elections, where daily trading volume was just RM2.9b.

▪ We expect a further increase in domestic bond yields over the next week, driven by the sharp rise in UST yields and steered by the release of Malaysia’s 2Q23 GDP today, which we anticipate will continue to chart a positive growth trajectory.

▪ Foreign demand for domestic bonds will likely stay robust for the rest of the year, partly driven by the prospect of better political stability following the outcome of the local state elections and the likelihood that major central banks have reached the end of their tightening cycles. Furthermore, Malaysian bonds may continue to benefit from foreign portfolio outflows out of China towards Emerging Asia.

Auction Results (14-August)

▪ The 5Y MGS 4/28 reopened at RM5.0b, with no private placement, and was awarded at an average yield of 3.647%.

▪ Demand was relatively subdued, recording a bid-to-cover (BTC) ratio of just 1.768x, the lowest in two months. The US Treasury sell-off and higher global bond yields likely had an impact on demand for the auction.

▪ The next auction will be the reopening of the 20Y GII 8/43, and we expect it to take place next week with an estimated issuance of RM5.0b including private placement.

Source: Kenanga Research - 18 Aug 2023