Government Debt Trend and Flows

▪ MGS and GII mostly decreased this week, moving between -4.6 bps to 3.8 bps overall. The 10Y MGS yield fell by 1.8 bps to 3.891%.

▪ Demand for short-term government bonds remained healthy, probably driven by renewed foreign interest amid uncertainty in US and European markets. That said, local yields did not track the sharp downturn in US bond yields.

▪ Next week, domestic bond yields are expected to remain relatively stable, as they are less affected by the heightened volatility observed in global bond yields. Likewise, we have raised our end-2023 forecast for the 10Y MGS yield to 3.65% (2022: 4.07%) from 3.45% previously, primarily due to the declining correlation with US Treasury yield movements as the Fed and BNM’s policy direction continues to diverge and markets price in potential Fed rate cuts for this year and next.

▪ The domestic bond market may have received decent foreign demand in March, as investors seek portfolio diversification beyond the US and Europe amid the banking crises. Foreign investors may also be looking to secure higher yields, given that most Southeast Asian central banks have concluded their tightening cycles.

Upcoming Auction

▪ The next auction is a reopening of the 30Y MGS 3/53, expected to take place next week, and we estimate an issuance of RM5.0b including private placement.

▪ After a few weak auctions, demand for the upcoming auction may pick up, as risk sentiment stabilises following the latest Fed meeting, and as investors find relatively higher yields attractive. Additionally, foreign investors may show renewed interest in Malaysian bonds as they look to diversify their portfolios with Asian assets.

Source: Kenanga Research - 24 Mar 2023