The government sold RM3 billion worth of the 5-year MGS (MGS Nov’21) in a reopening auction. The auction received weak demand, in our opinion, as bid-to-cover ratio was just 1.67

5-year MGS auction

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• The government sold RM3 billion worth of the 5-year MGS (MGS Nov’21) in a reopening auction. The auction received weak demand, in our opinion, as bid-to-cover ratio was just 1.67 times. This was despite average yield at the auction of 3.256% (within a narrow spread of 3.240-3.273%) which was higher than WI levels of 3.21/185% quoted a day before the tender closing.
• As the tender closed, secondary market trading of government bonds were under pressure due to the weaker Ringgit (USD/MYR around 4.1250) and crude oil price (Brent around $47.30 per barrel compared to around $50 last week), as well as tracking higher US Treasury yields ahead of the upcoming week’s FOMC meeting. Also, we noted players trimming positions amid the holiday-shortened week as well as unwinding of positions after Bank Negara Malaysia held the OPR at 3.00% at its recent MPC meeting.
• Despite the recent headwinds, we currently still prefer short-term bonds, looking at the possibility of further easing by Bank Negara later this year. Our short term target for the 3-year MGS is 2.82% (exit 2.93%), and with it now hovering around 2.86% means a pretty wide 3X5 MGS spread of 40bps (compared to a mean spread of 29bps since late May this year).