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

• The decline in the 10-year MGS yield can be partly attributed to favourable domestic conditions, including stable unemployment rates, robust retail sales, and strong IPI data. Additionally, Harris's strong showing in the presidential debate has reduced the likelihood of a Trump victory, while signs of a continued slowdown in the US labour market have enhanced the appeal of local bonds to foreign investors.

• We anticipate further declines in domestic bond yields next week, influenced by the upcoming US FOMC meeting, where a 25 bps rate cut is expected. Continued improvements in domestic macro could also exert downward pressure on yields due to increased foreign investment. Additionally, a stable OPR in a global environment of rate cuts could bolster demand for local bonds, contributing to further reduction in yields.

United States Treasuries (UST)

• UST yields trended lower this week, with declines ranging from -13.1 bps to -3.2 bps. The 10-year UST declined by 5.3 bps to 3.674%, while the 2-year UST saw a larger drop of 10.4 bps, settling at 3.639%, maintain the positive 10-2-year yield gap and signalling the dis-inversion of the yield curve.

• The more modest decline in UST yields compared to last week can be attributed to ongoing economic uncertainty in the US. Mixed data, including last Friday’s drop in the unemployment rate and persistently high inflation, tempered market expectations for a substantial 50 bps rate cut. Nevertheless, Kamala Harris, perceived to have the edge over Trump at the latest presidential debate and has increased the likelihood of a dovish policy tilt, though the true winner of the presidential race remains highly uncertain. Rising jobless claims and weakening small business sentiment further weighed on UST yields.

• Looking ahead, we anticipate UST yields to decline further as the FOMC meeting approaches, with markets widely expecting a 25 bps cut. Powell’s comments, along with the Fed’s economic projections, will be pivotal in shaping expectations for future rate cuts. Additionally, next week’s US retail sales and manufacturing data could further influence yields, especially if the figures underperform.

Auction Result

• The 20-yr MGII reopened at an expected total issuance of RM5.0b, with an average yield of 4.084%.

• Demand was somewhat muted, recording a bid-to-cover (BTC) ratio of 1.92x.

• The next auction will be the reopening of 7-yr MGS 4/31 at an expected issuance of RM4.5b, with no private placement.

Source: Kenanga Research - 16 Sept 2024