CIMB Fixed Income Updates 16 Feb 2016 - 7-year MGS auction result

7-year MGS auction result  

•  
• The government closed the auction of new 7-year MGS (MGS Aug’23) on Tuesday 16 Feb . The amount sold was RM4.0 billion which had met our projected expectation, seeing this was a new benchmark MGS paper. WI level of the new 7-year MGS was heard near 3.84% around time of announcement last week, to 3.80% just before the tender closing.
• The auction received fairly weak demand with bid-cover of 1.634 times and average yield of 3.80% (high yield of 3.817% and low of 3.785%), meaning there was demand for the fresh MGS late in the auction period.
• At 3.80% this is 40bps above the 5-year MGS (MGS Sep’20) – versus mean spread of about 30bps between the two in the past one year. Even though 7-year MGS and GII yields have tend to decline in the immediate month post auctions in the past 1-2 years, we prefer the 7-year GII (GII Jul’23) at 4.00%, which we target towards 3.95% for a spread of +15bps against the new 7-year MGS. We think the 7-year MGS will have difficulty to sustain below 3.80% as long as the 10-year MGS remains above 3.90%. Moreover, we think the market has not fully priced in inflationary expectation. Our economists have targeted Malaysia’s inflation to average 3.5% this year (latest CPI reading was +2.7% in Dec 2015).
• In any case, total outstanding MGS or GII with maturity in 2023 by adding the new RM4.0 billion MGS and RM4.0 billion new 7-year GII (GII Jul’23 issued in Jan) is now RM27.4 billion. MGS+GII with maturity in 2022 is a much larger RM40.0 billion (comprised of RM21.5 billion in MGS Aug’22 and Sep’22 and RM18.5 billion in GII Jul’22 and Nov’22). We think any outflow from MGS or GII 22s would best go into GII Jul’23 for yield pickup. Next auction for GII Jul’23 is in Apr  but we only expect a smallish amount of RM2.0 billion versus next auction of MGS Aug’23 (also in Apr) but we expect a higher RM3.5 billion offering size.