Bond Yields May Trade Rangebound Following Fed Rate Hike

MGS and GII yields surged last week, rising between 15.5bps to 29.5bps overall. The 10Y MGS yield rose by 17.8bps to 4.317%, its highest level since June 2022

Demand for domestic bonds remained pressured last week as the US Fed embarked on another 75bps rate hike and
signalled similarly large hikes going forward. This exacerbated global risk-off sentiment, which led to the weakest MGS auction performance for this year. Domestic yields may trend rangebound this week, as markets digest the latest Fed rate hike and as Malaysia’s inflation rate for August came within expectations of 4.7%. In the long-term, we expect yields to remain elevated and maintain our end-2022 target for the 10Y MGS at 4.35%.

Foreign demand for domestic bonds will likely have been weak in September, amid heightened global risk-off sentiment as the Fed raised its policy rate by another 75bps and as other major central banks followed suit. Meanwhile, domestic yield differentials continued to decline, with the 10Y MGS-UST yield spread falling to
63.2bps last week (previous week: 69.0bps).

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