KUALA LUMPUR: The domestic bond yields are expected to trend slightly lower next week, as US Treasury yields continue to fall and on a potential return of foreign interest in local bonds.
Kenanga Investment Bank Bhd said foreign demand for domestic bonds might remain relatively tepid in the near term, amid some risk aversion ahead of the US FOMC meeting but should show signs of improvement following progress on the US debt ceiling.
"Govvies will also find support from improving yield differentials against developed market bonds, with the 10-year MGS-UST spread returning to positive territory this week to 10.8 bps from the previous week of -1.9 bps," the research firm noted.
Kenanga noted that the yields of Malaysian Government Securities (MGS) and Government Investment Issues (GII) fell this week, moving between -9.8 bps to -2.7 bps overall.
The 10-year MGS yield decreased by 9.5 bps to 3.70 per cent, its lowest level in two weeks, while the 30-year MGS yield decreased by 3.1 bps to 3.39 per cent.
Kenanga said the domestic yields were steered by a sharp decline in global bond yields following the US debt ceiling impasse resolution.
The research firm said that sovereigns may have also benefitted from domestic safe-haven demand after May's manufacturing purchasing managers index (PMI) fell to 47.8, raising some concerns over declining demand and Malaysia's growth outlook.
On the local currency, Kenanga said the ringgit strengthened against the greenback as the US dollar index fell to near the 103.5 level amid US debt deal optimism, as the bill passed the House of Representatives by a vote of 314-117.
This, coupled with waning expectations of another 25 basis points rate hike by the Fed in its June meeting, has helped to push the MGS-UST yield differential back to positive territory, benefiting the ringgit.
However, US better-than-expected JOLTs and ADP readings, coupled with a weaker yuan, have capped the ringgit's gains, Kenanga noted.
"As the US Senate is expected to pass the debt limit suspension bill today, the ringgit may benefit and extend gains below the 4.60/USD threshold.
"However, the focus will quickly shift to the US nonfarm payroll report, as a higher-than-expected reading may drive back demand for the USD," the research firm said.
Kenanga said that next week, the trajectory of the ringgit might continue to be influenced by the Fed's policy expectations, as multiple Fed speakers have suggested that the Fed should at least skip a June rate hike.
"The market will also monitor China's economic data, and the MYR is poised to benefit if the reading is strong," it said.