KUALA LUMPUR: Domestic bond yields are expected to decline next week, driven by the expectation of solid domestic macro readings.

Kenanga Research said the anticipated moderation in the United States' (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.

The firm noted that Malaysian Government Securities (MGS) and Government Investment Issues (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 per cent t while the 10-year GII exhibited a slightly larger decline of 7.7 bps, reaching 3.722 per cent.

"The recent announcement by Prime Minister Datuk Seri Anwar Ibrahim regarding Malaysia's application to join BRICS, coupled with a strengthening ringgit and stable overnight policy rate, has bolstered demand for local bonds despite a moderating July PMI."

Kenanga Research added that increased expectations of a rate cut in September, amid US policymakers' acknowledgment of progress towards the 2.0 per cent inflation target during the Federal Open Market Committee (FOMC) meeting and a weakening US labour market indicated by declining job openings, had further increased demand for local bonds, driving domestic yields lower.

Meanwhile, it said US Treasuries (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 per cent for the first time since February, while the two-year UST yield registered a larger decline of 28.3 bps, reaching 4.148 per cent.

"This week, UST 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, it added.

UST yields are anticipated to continue their downtrend week, driven by further signs of a weakening US economy, particularly with expectations of a cooling labour market.

This could reinforce expectations for more rate cuts, Kenanga Research said, adding that more dovishness from the Fed speakers may also drive yields lower.

https://www.nst.com.my/business/corporate/2024/08/1086451/malaysias-bond-yields-slip-more-investments-flow-local-market