KUALA LUMPUR: Local bond yields may trend slightly higher this week, steered by the increase in global bond yields after the Fed's monetary policy decision and the European Central Bank's (ECB) 25 bps rate hike, which raised the main policy rate to 3.75 per cent, its highest level in over 22 years.
Kenanga Investment Bank Bhd said foreign demand for domestic bonds might sustain in the near term, continuing to benefit from some portfolio flows out of China and as foreign investors look to secure peak yields in Malaysia given that Bank Negara Malaysia (BNM) has probably completed its policy normalisation.
"Despite the Fed's rate hike, global risk sentiment may improve going forward as markets continue to price in potential rate cuts for early next year," the research firm said in a note.
The Malaysian Government Securities (MGS) and Government Investment Issue (GII) yields mainly increased last week, moving between -0.6 bps to 3.8 bps overall.
The 10-year MSG yield initially increased by 1.0 bps to 3.81 per cent on July 26 before turning lower to 3.80 per cent by Friday, down by -0.6 bps.
The firm noted that domestic bonds were relatively stable despite a broad increase in global bond yields following the Fed's resumption of rate hikes.
The daily trading volume for government bonds fell to RM3.7 billion last week from RM5.6 billion the previous week.
Touching on the domestic currency, Kenanga said the ringgit appreciated by around 0.25 per cent on a Thursday-to-Thursday basis against the US Dollar due to the below-consensus ISM manufacturing index print and decreased activity in US markets amid the US Independence Day holiday.
**Note to subs: The Institute for Supply Management (ISM) manufacturing index is the new term for the Purchasing Managers Index (PMI). It may be the new term for PMI. Google search, however, shows some news reports carried both terms.
However, the ringgit's gains were capped by a surge in the 10-year US Treasury yield above the 4.0 per cent level for the first time in more than four months amid hawkish Federal Open Market Committee (FOMC) minutes and strong private-sector job growth, Kenanga noted.
The research firm said the differential between Malaysian and US 10-year government bond yields would likely remain negative as BNM has adopted a more neutral stance, retaining the overnight policy rate at 3.0 per cent. At the same time, the Fed has become more hawkish in its policy stance, supported by strong US labour data.
"This, coupled with the current market consensus of another 25 bps rate hike by the Fed in July, will likely continue to exert downward pressure on the ringgit.
"However, the market is still expected to wait for the release of US non-farm payrolls tonight and US core inflation data next week before making any significant moves.
"That being said, any above-consensus reading may prompt another round of adjustment, weakening the local note," Kenanga said.