MGS and GII yields mostly increased this week, moving between -3.1 bps to 10.0 bps overall. The 10Y MGS yield
increased by 7.7 bps to 3.886%.
Domestic bonds were likely pressured by higher US Treasury yields this week, as markets cemented expectations of further
hikes by the Fed. However, yields turned lower yesterday following BNM’s decision to keep the OPR unchanged at 3.00%, raising the likelihood that it has completed its policy normalisation cycle.
According to investment house, Kenanga it anticipates only a slight uptick in domestic yields next week, despite the sharp rise in UST yields. BNM’s decision to maintain the OPR may serve as an anchor for government bonds and mitigate the impact of rising global yields.
Foreign demand for domestic bonds may remain weak in the near-term on heightened global risk-aversion ahead of the
upcoming US FOMC meeting (July 25 – 26). Malaysian sovereigns will also face pressure from relatively low yields
as developed market yields soar; the 10Y MGS-UST negative yield spread deepened this week (-14.3 bps; previous week:
-2.9 bps). The house maintains its view that the Fed will keep rates unchanged for the rest of the year as inflation
continues to ease and consumer spending shows signs of slowing.
Kenanga expects foreign inflows into the bond market to strengthen from August onwards, especially if the Fed adopts a dovish tone towards the end of the year.
