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

• MGS and GII yields mostly increased this week, moving between -0.2 bps to 2.1 bps overall. The 10-year MGS experienced a marginal rise of 0.8 bps, reaching 3.771%, while the 10-year GII saw a modest increase of 0.4 bps, settling at 3.782%.

• Despite a cooling in inflationary pressures, as indicated by the moderation in July’s producer and consumer price indices, the rise in local yields was primarily driven by hawkish remarks from Fed Governor Bowman, who emphasized ongoing inflationary risks and a resilient labour market. Market seems to have mostly priced in the higher 2Q24 GDP growth at 5.9% (Consensus: 5.8%; KIB: 5.1%; 1Q24: 4.2%)

• The release of strong US retail sales data and a drop in jobless claims may dampen expectations of aggressive rate cuts, potentially nudging local yields slightly higher. However, dovish signals from the Fed next week, coupled with robust Malaysian macroeconomic data, could bolster investor confidence in the domestic economy, encouraging bond purchases and exerting downward pressure on yields.

United States Treasuries (UST)

• UST yields exhibited mixed movements this week, ranging from -10.6 bps to 5.5 bps. The 10-year UST dipped by 7.5 bps to 3.913%, while the 2-year UST rose by 5.5 bps, settling at 4.093%, buoyed by positive retail sales figures.

• The 10-year UST yield briefly dipped to 3.835% on Wednesday, driven by softer US inflation data, which reinforced the case for Fed rate cuts. However, yield rebounded above 3.900% as strong retail sales, and a robust labour market eased concerns about an economic slowdown. That being said, subdued inflationary pressures point to a sustainable path toward the Fed’s 2.0% inflation target. Combined with dovish comments from some Fed officials, the 10-year UST remains anchored above the 4.000% threshold.

• We anticipate a modest decline in UST yields next week, underpinned by a potential downturn in existing home sales data and dovish hints from Fed Chair Powell during the Jackson Hole Economic Symposium on Aug 22-24. The market will also be keenly attuned to the tone in the FOMC minutes.

Auction Result

• The 30-yr MGS reopened at an expected total issuance of RM5.0b, of which RM2.0b was privately placed with an average yield of 4.172%.

• Demand was relatively weak on a RM3.0b auction size, recording a bidto-cover (BTC) ratio of 1.95x.

• The next auction is the reopening of the 5-yr MGII at an expected issuance of RM4.5b without any private placement.

Source: Kenanga Research - 16 Aug 2024