Malaysian bonds retreat as US yields, oil prices rise

KUALA LUMPUR: Malaysian government bonds came under pressure last week as rising US Treasury yields and a rebound in oil prices reversed an earlier rally, according to CIMB Securities Sdn Bhd.

The firm said Malaysian Government Securities (MGS) yields rose by one to four basis points week-on-week, with the 10-year yield climbing back towards four per cent after falling as low as 3.89 per cent during the week.

The 30-year MGS yield rose four basis points to 4.40 per cent, while the three-month Kuala Lumpur Interbank Offered Rate (Klibor) increased three basis points to 3.51 per cent.

CIMB Securities senior economist Lim Yee Ping and research head Michelle Chia said the rise in Klibor suggested banks were building liquidity buffers ahead of the RM29.5 billion Government Investment Issues (GII) redemption on Sept 30 and quarter-end funding requirements.

The Malaysian overnight rate, meanwhile, remained at 2.75 per cent, indicating that tighter conditions were concentrated in term funding rather than overnight liquidity.

Despite the softer market, demand for the reopening of the seven-year MGS 04/33 on Sept 21 remained strong.

The RM5 billion auction attracted RM10.84 billion in bids, translating into a bid-to-cover ratio of 2.168 times, with offshore investors accounting for much of the demand.

"Demand was led by offshore accounts, with the bond offering attractive relative value against the 10-year benchmark as the seven-year to 10-year spread was only around two to three basis points.

"The strong auction outcome suggests that the preceding nine-week cheapening had created sufficient valuation support to attract real-money demand, although the subsequent rise in US Treasury yields has reduced some of the near-term momentum," they said in a note.

Attention now turns to the reopening of the 30-year GII 01/56 today, comprising a RM3 billion public tender and an additional RM2 billion private placement.

Lim and Chia said the auction would test investor appetite for longer-dated government debt, particularly after the sharp rise in long-end US Treasury yields.

"Sustained demand at the long end will be important for determining whether the recent steepening can be maintained," they said.

The market will also monitor Malaysia's August fiscal data, due on Sept 30, for signs of how higher oil prices are affecting the government's subsidy bill.

The figures will also indicate whether Putrajaya remains on track to meet its 2026 fiscal deficit target of 3.5 per cent ahead of the 2027 Budget on Oct 9.

Meanwhile, the Melaka state assembly was dissolved on Sept 23, triggering a state election that must be held within 60 days.

The Election Commission is scheduled to meet on Oct 7 to determine the election timetable.

"The state election adds another near-term political catalyst ahead of the broader election cycle, although the immediate market impact is likely to remain limited," they said.

Globally, US economic data will take centre stage this week as investors assess whether expectations of a more hawkish Federal Reserve have further room to run.

CIMB Securities said key releases include August job openings, September personal consumption expenditures inflation, the ISM manufacturing survey and, most importantly, September non-farm payrolls and wage growth.

The data, due between Sept 29 and Oct 2, will help investors assess the strength of the US economy and the outlook for further interest rate increases.

Fed officials and European Central Bank president Christine Lagarde are also scheduled to speak, while oil prices and geopolitical developments remain key risks to the inflation outlook.

Within Asean, Indonesia's September inflation and August trade data are due on Oct 1.

Thailand's Constitutional Court is also scheduled to rule today on a challenge concerning ballot secrecy in the Feb 8 election.

CIMB Securities said the ruling could have implications for the Thai government, although global oil prices and US economic data would remain key drivers across regional markets.