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

▪ MGS and GII yields saw varied movements this week, ranging between -1.9 bps to 1.6 bps overall. The 10-year MGS fell 1.1 bps to 3.745%, while the 10-year GII edged up by 0.5 bps to 3.787%.

▪ The decline in the 10-year MGS yield was largely due to falling 10- year UST yield amid weaker-than-expected US JOLTS data, which boosted market expectations of a 50 bps Fed rate cut in September (currently priced at over 40.0%, up from around 30.0% last week). Domestically, BNM’s decision to hold the OPR steady at 3.00% helped stabilize the investment landscape. This, alongside Malaysia’s recent trade agreement with New Zealand, potential partnerships with Russia, and a continued push for AI development, has attracted RM3.0b in bond inflows this week, pushed yields lower. Additionally, Malaysia’s efforts to join BRICS further solidified its economic standing, with MGS-UST yield differential turned positive on 4th September for the first time since July 2023.

▪ Looking ahead, we expect a further decline in local yields next week, supported by a potentially resilient industrial production and retail sales data, along with stable employment data. Should today’s US nonfarm payrolls and unemployment figures fall short of expectations, UST yields may decline, putting additional downward pressure on MGS yields.

United States Treasuries (UST)

▪ UST yields fell sharply this week, moving from -15.0 bps to -12.6 bps. The 10-year UST down 13.5 bps to 3.727%, while the 2-year UST saw a larger decline of 15.0 bps, settling at 3.744%. Notably, the yield curve briefly dis-inverted on Wednesday, following a weak JOLTS report, but later re-inverted as the 10-year UST later fell more rapidly than the 2-year treasury due to mixed US economic data.

▪ Concerns about softening US labour market, rising recession fears, drove the UST yield decline. However, these concerns haven’t shifted the Fed’s stance significantly, as evidenced by yesterday’s low jobless claims and a resilient US services sector.

▪ Next week, we expect UST yields to see mixed movements, influenced by today’s nonfarm payrolls and unemployment data, which are likely to align with market consensus. Additionally, next week’s core CPI, which is projected to remain stable at 0.2% MoM, will be a crucial indicator. Any signs of a deeper economic slowdown could push yields lower and lead to a sustained yield curve dis-inversion, signalling potential weaker growth ahead.

Auction Result

▪ There was no issuance or reopening of bonds this week.

▪ The next auction is the reopening of 20-yr MGII 8/43 at an expected issuance of RM3.0b, with an additional RM2.0b to be privately placed.

Source: Kenanga Research - 9 Sept 2024