MGS and GII yields mostly increased this week, moving between -3.7 bps to 5.2 bps overall. The 10Y MGS yield initially fell by 4.3 bps to 3.648% on May 15, before rising to 3.734% by yesterday (+4.3 bps).
Sovereigns saw decent demand at the very beginning of the week on the back of a better-than-expected 1Q23 GDP reading of 5.6% (Consensus: 5.1%; 4Q22: 7.0%). However, domestic yields then turned higher, steered by a surge in global bond yields amid relatively hawkish comments by Fed officials and as the Bank of England raised its policy rate by another 25 bps to 4.5%.
For next week, according to Kenanga it house expects domestic bond yields to trend rangebound-to-higher. The main driver will be soaring UST yields, although the impact should be relatively mild. Foreign demand may be relatively tepid in the near-term, amid global risk aversion due to the Fed’s recent rate hike and the ongoing US debt ceiling impasse. Furthermore, demand for domestic bonds may be impacted by narrower yield differentials against US Treasuries, with the 10Y MGSUST spread down to a mere 8.8 bps (previous week: 30.7 bps). That said, we reckon the US will not default and we expect risk-sentiment to turn positive after an agreement is reached and should the Fed pause at its upcoming meeting (June 13 – 14), leading to greater foreign portfolio inflows.
