Local Bond Yields To Continue Downward Trend

Local bonds, MGS, and GII yields fell last week, moving between -14.7bps to – 1.5bps overall. The 10-year MGS fell by 8.9bps to 3.926%, reaching its lowest level since March, whilst the 30Y MGS yield decreased by 14.7bps to 4.578%.

Demand for domestic bonds remained strong last week, steered by lower global bond yields as recession remained a major
concern and despite the US Fed raising rates by another 75bps. As such, the weekly trading volume for government bonds increased by 16.1% to RM16.65b (previous week: RM14.34b).

Domestic yields will likely maintain a downtrend this week, as demand for local bonds remains robust and as global bond yields decline following the recent US GDP report. For the long-term outlook, Kenaga has revised down its end-2022 10Y MGS yield target to 4.35% from 4.60% previously (2021: 3.60%), as it reckons global bond yields may register lower than initially expected amid growing recessionary risk.

Foreign demand for domestic bonds may improve in August following expected weakness in July after the ECB’s larger-than-expected 50bps rate hike, another 75bps hike by the Fed, and RM19.0b worth of domestic bonds have matured. Nonetheless, foreign portfolio flows will still be generally pressured by global risk-aversion as recession fears remain paramount.

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