KUALA LUMPUR: Domestic yields may trend rangebound-to-lower this week amid declining US Treasury (UST) yields and sustained fears regarding the spread of the Omicron variant globally.
Kenanga Investment Bank Bhd said yield movements for the Malaysian Government Securities (MGS) and Government Investment Issue (GII) were mixed last week, moving between -4.6bps to 10.7bps overall.
The 10-year MGS yield initially rose by 0.9bps to 3.56 per cent on December 15, before closing the week lower at 3.54 per cent, down by 1.1bps.
Demand for MGS was pressured at times last week, especially following the US Federal Open Market Committee (FOMC) meeting, which saw a hawkish Fed announce a faster taper.
Kenanga said that concerns on the Omicron variant led to renewed risk-off demand for Malaysian bonds by the end of the week.
"We expect foreign outflows from the Malaysian bond market to persist in the near-term due to the uncertainty surrounding the Omicron variant and the resurgence in Covid-19 infections in some parts of the world," the research firm said in a note today.
Furthermore, bond flows will also be impacted by the Fed's decision to quicken the taper and its signal of possibly three rate hikes next year.
However, Malaysian bonds may still find some support from increasingly high yield differentials, Kenanga noted.
"Nevertheless, we expect a net debt selloff in December with a higher probability of the quantum to exceed November's RM3.6 billion."
Moving on to the local currency, Kenanga said the ringgit ended the week lower by 0.18 per cent week-on-week (WoW) against the US Dollar last week, amid a more hawkish tone by the US Fed as it announced faster quantitative easing (QE) taper and signals a sooner and at least three rate hikes in 2022.
Due to uncertainty over the Omicron variant, the local note was also affected by relatively lower crude oil prices and rising USD index (DXY).
"The ringgit may continue to be weighed by the US Fed hawkish tone and surging Covid-19 cases in Europe amid the spreading of the Omicron variant."
Kenanga also noted that the lack of local catalysts and severe floods in Klang Valley, which may disrupt growth recovery, may also pressure the local note.
Thus, downside bias against the US Dollar remains.