Long-term bond yields dipped on growing trepidation of a potential US recession

Published on 22 Jul 2022.

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Foreign investors turned net sellers of MGS and GII in June, reducing their holdings by RM4.3 bil after a brief respite in May (+RM0.4 bil). However, interest in short-term government securities (MTB & MITB) stayed keen, with net foreign purchases of RM233.1 mil in June extending their inflow streak to five consecutive months. Overall, the total foreign outflow amounted to RM4.1 bil last month.

The foreign outflow was largely induced by fears of more aggressive US monetary policy tightening as well as risk aversion amid rising concerns over a potential global economic slowdown. The flight-to-safety sentiment resulted in a broad rise in bond yields as 1-year and 10-year MGS yields respectively climbed 33.1 bps and 6.5 bps m-o-m as of end-June.

Selling pressure on longer-duration bonds, however, appears to have waned since mid-June as long-term yields started to fall despite a continued uptick in short-term yields. The 10-year MGS yield fell from 4.33% on 15 June to 4.06% on 20 July, tracking the decline in the 10-year UST yield from 3.33% to 3.04% over the same period. The dip in long-term yield stemmed from growing trepidation over a potential US recession, which could entail future rate stays or cuts. As investors continue to assess the economic outlook, longer-term yields are expected to remain pressured on the downside in the near term. Shorter-term yields will likely continue to trend upwards in response to further monetary policy tightening.

 

Analytical contact Woon Khai Jhek, CFA (603) 3385 2512 khaijhek@ram.com.my

Media contact Sakinah Ariffin (603) 3385 2505 sakinah@ram.com.my

 

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