Yields expected to move range-bound this week

KUALA LUMPUR: Malaysian Government Securities (MGS) and government investment issues (GII) yields were mixed last week, moving between -2.1 basis points (bps) and 2.9 bps overall.

Kenanga Investment Bank Bhd (Kenanga IB) said in a report yesterday the 10-year MGS initially rose 6.7 bps to 3.25 per cent on July 12 before declining to 3.19 per cent, 0.9 bps higher than the previous week.

The research firm said MGS and GII yields began the week higher following reports that Malaysia’s daily vaccination rate breached 400,000 doses.

However, by mid-week, demand for bonds strengthened as Covid-19 infections rose to record highs and United States Treasury yields declined, it noted.

Looking ahead, Kenanga IB said domestic yields might move range-bound this week as risk-off sentiment remained amid persistently high Covid-19 cases.

Nevertheless, rising vaccination rates might begin to lift yields in the coming weeks, it said.

“In the medium to long term, we still expect yields to return to an uptrend as lockdown restrictions are eased in line with the National Recovery Plan.

“Despite foreign inflows for Asian bonds soaring to a two-year high last month, foreign demand for Malaysian debt is expected to remain pressured in the near term. However, in the medium term, we expect foreign inflows to return as lockdown measures are eased.

“Additionally, yield differentials remain attractive, with the 10-year MGS-US Treasury spread rising to 190.6 bps compared with 182.8 bps in the previous week.”

On the ringgit, Kenanga IB said it weakened against the US dollar and posted the lowest weekly close since July 31 last year as the ringgit faced strong selling pressure.

Even though the 10-year US Treasury yield fell below the 1.3 per cent level, the local note broke above the 4.20 per US dollar threshold due to the rising US dollar index (DXY) and falling Brent crude oil price.

“The ringgit will likely trade in a tight range between 4.19 and 4.21 this week as Malaysia’s new Covid-19 cases are expected to remain in the five-digit territory in the near term amid increased testing capacity.

“The direction of the local note may continue to be influenced by the crude oil price, DXY and market sentiment, potentially leading to further depreciation of the ringgit if investors turn more cautious,” added Kenanga IB.