KUALA LUMPUR: Domestic bond yields may trend rangebound-to-higher next week, finding stability following the Fed's rate skip but likely steered by higher global bond yields after the European Central Bank (ECB) raised rates by 25 bps.
Kenanga Investment Bank Bhd said foreign demand for domestic bonds is expected to be slightly subdued in June amid relatively low yield spreads against developed market bonds.
However, foreign inflows could gain momentum in the second half (2H) of 2023 as global risk aversion eases following the Fed's decision to keep rates unchanged, with further upside potential if the Fed ceases rate hikes for this cycle.
"That said, there is some risk of foreign outflows should the Fed resume rate hikes in the coming months," the research firm said in a note.
The Malaysian Government Securities (MGS) and Government Investment Issue (GII) yields increased this week, moving between 0.3 bps to 5.4 bps overall. The 10-year MGS yield initially fell by 0.6 bps to 3.71 per cent on June 13 before rising to 3.73 per cent by Thursday (+1.5 bps).
Kenanga said the domestic bond yields returned to an uptrend following the US Federal Open Market Committee (FOMC) meeting, given the Fed'sFed's relatively hawkish outlook despite the decision to keep rates unchanged for the time being.
Kenanga noted that foreign demand for domestic bonds remained surprisingly resilient in May, recording greater foreign inflows despite global risk-off sentiment over the US debt ceiling and Fed hawkishness.
Meanwhile, on the local currency, Kenanga said the ringgit might face continued pressure due to the anticipated further weakening of the yuan, as the People's Bank of China (PBoC) is expected to lower its one-year loan prime rate by 10 bps next week to boost its sputtering economy.
However, the ringgit's depreciation is expected to be limited around the 4.62-4.63 level, as the US Dollar index chart (DXY) is likely to hover near the 102.0 level amid a lack of market conviction in the Fed's recent hawkish guidance.
"The market may continue to look for signs of US disinflation and slowing economic activity before buying risk assets," Kenanga said.
The research firm said that even though the DXY fell by 1.2 per cent on a Thursday-to-Thursday basis, the ringgit still weakened against the greenback, mainly due to the depreciation of the yuan following the unexpected decision by the PBoC to reduce its key short-term policy rates by 10 bps.
Additionally, the ringgit faced pressure from Malaysia's relatively subdued economic sentiment, which was influenced by China's economic downturn and uncertainty surrounding the direction of US monetary policy following the Fed's hawkish pause, it said.
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