KUALA LUMPUR (May 15): The Malaysian government bond yield curve could steepen in the short term while investors watch rising supply of longer-dated bonds in the coming months, said United Overseas Bank (UOB).

The 20-year Malaysian Government Securities (MGS) auction in May has seen strong demand, UOB noted, but flagged that the auctions of 15-, 20-, and 30-year Government Investment Issues in the coming months will provide a test on demand for longer-dated bonds, UOB said.

A steeper yield curve in the MGS “could emerge given that the front end is close to fully priced” as the overnight policy rate stays unchanged for some time. “The back end is relatively rich which sets a high bar for inflation surprise as well as the upcoming long end auctions performance,” it said.

A steepening curve happens when the spread between short- and long-term bond yields is widening. That means either yields on long-term bonds are rising faster than that of short-term bonds, or short-term yields are falling faster than long-term yields.

Further, a steepening typically points to stronger economic growth and rising inflation expectations that lead to higher interest rates. Bond yields and prices move inversely.

This year’s bond auctions have performed better than 2023’s averages with longer maturities of 15 years and more commanding higher bid-to-cover ratios than that of shorter maturities, UOB noted.

Bid-to-cover ratios, a measure of demand from investors, have ranged from 1.7 times to 4.4 times so far this year. The latest MGS issue that matured in May 2044 drew a bid-to-cover ratio of 3.09 times with average yield of 4.18%.

“Any slippage may induce the market to seek a deeper concession in order to absorb further duration,” UOB said, adding that the “mid-curve could also richen further in this backdrop”.

UOB is forecasting the yield on 10-year MGS to fall towards 3.88% by June, 3.83% by September and 3.78% by December.

The yield on the benchmark paper maturing in November 2033 closed at 3.91% on Tuesday and has risen 17 basis points, or 0.17 percentage point, so far this year, tracking the spike in yields of US Treasury as strong growth and high inflation in the world’s largest economy pushed the Federal Reserve to delay rate cuts.