This article first appeared in The Edge Financial Daily on May 24, 2018

KUALA LUMPUR: The RM3.5 billion reopening auction of the 10-year Malaysian Government Securities (MGS) maturing in June 2028 saw disappointing demand amid concerns over the government’s debts that have exceeded RM1 trillion.

According to Maybank Kim Eng’s (Maybank KE) note yesterday, the reopening bid saw a bid-to-cover (BTC) ratio of 1.85 times despite a slightly lower-than-expected RM3.5 billion size. The BTC is used to express the demand for a particular security during offerings and auctions. The higher the ratio, the higher the demand and a BTC of above 2.0 usually indicates successful auctions with aggressive bids.

“The bidding interest is apparently tepid at such a cover ratio compared to about 3.4 times recorded in the previous seven-year GII (Government Investment Issues) 8/25 auction,” it said.

Maybank KE analyst Winson Phoon said a weaker ringgit against the US dollar in the morning did not help sentiment as news of the RM1 trillion debt likely raised concerns over supply risks.

He, however, noted there were no details on whether the RM1 trillion included contingent liabilities and a full crystallisation of debts under 1Malaysia Development Bhd.

Similarly, CIMB fixed income strategist Nik A Mukharriz highlights the disappointing demand for the latest auction compared to the BTC of 2.066 times for the RM3.5 billion sale of 10-year MGS done in February this year and the RM4 billion sale of the GII maturing October 2028, done in April, which saw a BTC of 2.696 times.

The 10-year MGS yield also rose to 4.222% from 4.156% prior to May 9 when the 14th general election (GE14) was held. The yield was at its highest since February 2017. Nonetheless, despite rising yields, the ringgit remains one of the region’s outperformers.

“It is true the ringgit has performed much better than most of its emerging market peers over the past month, and the currency actually stands as one of the few emerging market currencies that have actually gained against the US dollar this year,” FXTM global head of currency strategy & market research Jameel Ahmad said.

He said the strength in the ringgit could be due to the Malaysian economy’s underlying strength and that the currency had been oversold in the past could have encouraged investors to hold onto Malaysian assets.

Jameel, however, cautioned that the Turkish lira crisis carries risks for the ringgit as it could present a knock-on impact on risk appetite elsewhere, resulting in less attraction towards emerging market currencies including the ringgit.