Malaysian government bonds closed weaker on thinner trading last week. Average daily volume fell to RM1.2 billion per day from RM2.1 billion per day the previous week. There was an upward bias for bond yields amidst the weak demand in the reopening auction of the 5-year MGS. A jump in interest rate swaps also pressured yields upwards. Up until Thursday, the 3-year MGS was unchanged at 2.89% while the 10-year MGS rose 8bps to 4.22%. The 5-year MGS saw its yield rising 12bps to 3.83%.

In the RM4.5 billion reopening of the 5-year MGS (maturing in February 2015), bid-to-cover ratio amounted to 1.352 times, compared with the higher bid cover of 1.713 times when the paper was first auctioned in August this year. Average yield at the latest auction was 3.776%, compared with 3.741% at the previous auction. As the market focus was centred on the auction, MGS players shrugged aside the release of the latest industrial production data. The Statistics Department reported that the August industrial production showed a slower contraction of 5.7% y-o-y in August, compared with a downward revised 8.1% decline in July.

This week, we expect greater activity in the MGS segment. Fresh drivers should include Bank Negara Malaysia’s announcement of the 10.5-year GII auction, where we expect the issuance size to total RM3.5 billion. Also slated is the release of the September CPI and the unveiling of the 2010 Budget.

Ringgit IRS rates rose further last week. Rates were especially pressured after US treasury yields jumped during mid-week. The 5-year IRS was seen rising 15bps on a weekly basis.

The corporate bond market turned less active, mimicking the lacklustre interest in MGS trading. Average daily trading fell to RM140 million per day. The crux of the trading was in the AAA segment as the lower credit segment continued to lag in interest. Among the trades done were PLUS Jun’17, which rose 5bps to 4.85%, and MISC Sep’12, which rose 2bps to 3.42%. MISC Jul’11 fell 11bps lower to 2.9%, while Cagamas MBS Aug’12 shed 37bps to 3.48%.

In the lower credit segments, heavily traded papers included Hyundai Cap May’11 (AA1), which rose 6bps to 4.92%, and YTL Corp Jun’14 (AA1), which rose 5bps to end at 4.4%.

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This article appeared in Capital page of The Edge Malaysia, Issue 777, Oct 19-25, 2009.