Malaysian Government Securities (MGS) and Government Investment Issues (GII)

• MGS and GII yields trended downward last week, falling between -7.7 basis points (bps) to -3.4 bps overall. The 10-year MGS declined by 7.5 bps, settling at 3.709%. while the 10-year GII exhibited a slightly larger decline of 7.7 bps, reaching 3.722%

• The recent announcement by the Prime Minister regarding Malaysia’s application to join BRICS, coupled with a strengthening ringgit and stable OPR, has bolstered demand for local bonds despite a moderating July PMI. Furthermore, increased expectations of a rate cut in September, amid US policymakers’ acknowledgment of progress towards the 2.0% inflation target during the FOMC meeting and a weakening US labour market indicated by declining job openings, have further increased demand for local bonds, driving domestic yields lower.

• We anticipate that local yields may continue to decline next week, driven by the expectation of solid domestic macro readings. Additionally, the anticipated moderation in the US labour market, with an expected weakening of the non-farm payroll and a higher unemployment rate, may further attract investment to the domestic bond market due to increased expectations for US rate cuts.

United States Treasuries (UST)

• UST yields plunged significantly this week, moving between -29.7 bps to -20.7 bps. The 10-year UST recorded a decline of 26.5 bps, settling below 4.000% for the first time since February, while the 2- year UST yield registered a larger decline of 28.3 bps, reaching 4.148%.

• This week, US Treasuries rallied, driven by escalating tensions in the Middle East following Israel’s assassination of a Hamas leader, which heightened demand for safe-haven assets. Additionally, market enthusiasm was fuelled by Fed Powell’s dovish remarks, suggesting that rate cuts could be on the horizon as early as September. This sentiment was reinforced by other policymakers who highlighted progress in cooling inflation. The weakening US labour market and manufacturing activity, further supported the dovish outlook, leading to increased bond-buying activity and lower yields.

• US Treasury yields are anticipated to continue their downtrend next week, driven by further signs of a weakening US economy, particularly with expectations of a cooling labour market, which could reinforce expectations for more rate cuts. More dovishness from Fed speakers may also drive yields lower. Additionally, developments in the geopolitical situation in the Middle East will be closely monitored, as continued escalation could potentially drive yields lower due to a flight to safety.

Auction Result

• There was no issuance or reopening of bonds this week.

• The next auction is the reopening of the 7Y MGII 10/31 at an expected issuance of RM4.5b without any private placement.

Source: Kenanga Research - 5 Aug 2024