Malaysian government bond yields rose across the curve last week, led by a selloff in longer-dated securities as higher US Treasury yields and escalating US-Iran tensions weighed on the domestic bond market, according to Kenanga Research.
Malaysian Government Securities (MGS) and Government Investment Issues (GII) yields increased by between 1.3 and 11.1 basis points (bps), with selling concentrated in the seven- to 10-year segment.
The benchmark 10-year MGS yield climbed 11.1 bps to 3.985%, while the 10-year GII yield increased 10.1 bps to 3.953%.
Kenanga said external interest-rate developments were the primary driver of the move.
Cautious remarks from US Federal Reserve Chair Kevin Warsh at Jackson Hole tempered expectations for near-term US interest-rate cuts, while escalating tensions between the US and Iran pushed up shorter-dated US Treasury yields and oil prices.
Domestic developments had a more limited influence on the bond market.
Malaysia’s Manufacturing Purchasing Managers’ Index eased to 50.2 in August from 50.7 in July, while Bank Negara Malaysia kept the Overnight Policy Rate unchanged at 2.75% for a seventh consecutive Monetary Policy Committee meeting.
Kenanga expects the 10-year MGS yield to test higher early this week as the domestic market catches up with movements in US Treasuries.
The local bond market had closed before Friday’s stronger-than-expected US payrolls report, meaning the MGS curve had yet to fully price in the subsequent US Treasury move.
Domestically, upcoming industrial production, retail sales and labour market data could provide some support to Malaysian bonds.
However, Kenanga said the US Consumer Price Index release on Sept 11 remains the key external event for the market, given its potential implications for the Federal Reserve’s interest-rate outlook.
Despite the rise in yields, foreign demand for Malaysian government bonds strengthened substantially during August.
Foreign investors turned net buyers, recording RM11.1 billion of inflows into Malaysian government bonds during the month, with RM5.6 billion arriving in the final week alone.
The bond inflows contrasted with continued foreign selling in the Malaysian equity market.
Foreign institutions extended their net selling streak on Bursa Malaysia to four consecutive weeks during the period covered by Kenanga’s report, recording RM366 million in net equity outflows.
The divergence points to different foreign positioning across Malaysian asset classes, with investors increasing exposure to government debt while remaining cautious on equities.
Kenanga expects global interest-rate developments to continue driving the near-term direction of Malaysian bonds, with the US inflation reading likely to be the decisive external catalyst for yields this week.
