MGS Bond Yield’s To Rise Ahead of US Inflation Reading

MGS and GII yields declined last week, moving between – 13.8bps to -0.6bps overall. The 10Y MGS yield fell by 7.5bps to
a 6-week low of 4.149%.

Demand for domestic bonds improved last week, steered by the recently falling global bond yields and following the expected 25bps rate hike by BNM. Nonetheless, the bond market recorded its largest net foreign outflow in over 2-years in June, as foreign demand was impacted by the US Fed’s aggressive tightening and global risk-aversion.

Domestic yields will likely return to an uptrend this week on the back of higher US Treasury yields following a strong US jobs report. Likewise, expect yields to trend even higher should US inflation register higher-than-expected on July 13. Kenanga expects bond outflows to worsen in July, as the Fed potentially raises rates by another 50 – 75 bps, global risk-off
sentiment intensifies on recession concerns, and as RM19.0b worth of domestic bonds are scheduled to mature.

Furthermore, the 10Y MGS-UST yield spread continues to narrow (107bps; previous week: 134bps), making local bonds
less attractive to foreign investors.

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