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

• Yield Movement: MGS and GII yields generally trended higher this week, increasing between 0.0 to 4.0 basis points (bps). The 10-year MGS climbed 2.6 bps, settling at 3.806%, while the 10-year GII edged up by a marginal 0.3 bps, settling at
• Key drivers: Domestic bond yields rose, influenced by geopolitical volatility in Syria and political instability in South Korea, which heightened demand for safe-haven assets. Locally, weaker IPI data added upward pressure on yields. However, Malaysia saw RM2.4b in inflows this week, likely into bills and corporate bonds, supported by a stable unemployment rate and stronger distributive trade sales. Investor sentiment was further bolstered by the launch of Penang Silicon Design @5.0km+ initiative, which underscored Malaysia's economic growth potential, attracting foreign investors. Meanwhile, US inflation data aligned with expectations, and a rise in the unemployment rate strengthened the case for next week's Fed rate cut, possibly drawing more foreign inflows into Malaysian debt market.
• Flows and yields outlook: Local yields could trend lower next week in anticipation of the Fed 25 bps rate cut. On the domestic front, stable CPI and trade figures, due for release next week, are expected to reinforce demand for local debt instruments, supporting potential inflows. However, we expect net inflows of bond funds to be small if any.

United States Treasuries (UST)

• Yield Movement: UST yields increased significantly by 4.7 bps to 21.0 bps. The 10-year UST surged by 15.2 bps to 4.328%, while the 2-year UST gained 4.7 bps to 4.191%.
• Key drivers: The rise in UST yields was driven by hotter-than-expected PPI data and China's announcement of additional stimulus measures to bolster its economy. This, along with a sharp rise in the NFIB Small Business Optimism Index and a ballooning US budget deficit in November also added upward pressure. These factors overshadowed the in-line inflation data reading, and the anticipated Fed rate cut next week, alongside heightened global political and geopolitical risks that sustained demand for safe-haven assets.
• Outlook: While a rate cut is anticipated, prompting investors to lock in attractive US bond yields ahead of the decision, UST yields could see modest gains next week if the Fed's dot plot signals a less dovish trajectory and retail sales data surpass expectations. Bond Market Weekly Outlook Domestic yields set to decline ahead of Fed rate decision

Auction Result

• The 10-yr MGS 07/34 reopened at lesser than expected issuance of RM2.0b, with an average yield of 3.776%.
• Demand was steady, with a bid-to-cover (BTC) ratio of 2.01x

Source: Kenanga Research - 13 Dec 2024