The RM2.0 billion 20-year MGS (MGS May’35) reopening auction saw decent demand with a bid-to-cover ratio of 2.154 times. Average yield was 4.295%, slightly wider than WI level 4.28/20% heard a day prior and 4.29/27% the morning th

20-year MGS auction

• The RM2.0 billion 20-year MGS (MGS May’35) reopening auction saw decent demand with a bid-to-cover ratio of 2.154 times. Average yield was 4.295%, slightly wider than WI level 4.28/20% heard a day prior and 4.29/27% the morning the tender closed.
• We think that demand was dampened by the weaker secondary trading following the overnight rise in yields in UST and Euro Zone sovereign debt space. On top of continued pricing of a Dec FOMC rate hike, sentiment in bond markets were upended with a positive number in UK’s 3Q2016 GDP (up 0.5% qoq). In Asia, BoJ’s Kuroda on Thursday reiterated the central bank’s intention for a steeper bond yield curve, as both the European and Japan monetary authorities appear to be baulking to continue deep monetary stimulus next year. Furthermore, pressure is expected to persist due to uncertainty ahead of the Nov FOMC meeting as well as US presidential election.
• In our opinion, the 20-year MGS now appears to be relatively attractive at 4.295%, offering 27bps spread against the 15-year benchmark, in contrast to a mean spread of 15bps since early this year. Conservatively, we reckon that the 20-year MGS may tighten by around 5bps if sentiment improves. Moreover, we think players in the bonds and swaps market remained wary of potential central bank rate cut come the Nov MPC meeting. The 3-year MGS remains below the OPR level around 2.98%.
• Including the latest auction, the Malaysian government’s total issuances of MGS+GII rose to RM79.5 billion. On the other hand, there will be three other government securities auctions scheduled in the final two months of the year, which include 7-year GII, 10-year MGS and 20-year GII. Based on the federal government’s (estimated) target gross domestic borrowing of RM86.5 billion revealed in the latest Budget 2017 announcement, could mean another RM7.0 billion issuances in the remaining three auctions.