KUALA LUMPUR (May 10): Yields of Malaysian Government Securities (MGS) are projected to open higher when the market resumes trading on Monday, according to analysts at Standard Chartered.

In a note released by Standard Chartered Bank today, it said the defeat for the incumbent government following Malaysia's 14th general election has surprised markets, and that local demand for long-end MGS is likely to mitigate any excessive selling.

"Our long 10-year MGS recommendation is 18 basis points away from our stop-loss level at 4.3%, based on the last closing price on May 8. Local demand for long-end MGS is likely to mitigate any excessive selling.

"We continue to like 10-year MGS, but market conditions may not be favourable for our long position," it said.

It said positioning was biased towards long ringgit assets given the sound macro backdrop, whereby higher oil prices have a positive fundamental impact on Malaysia and current low inflation also supports the ringgit.

However, foreign investors may reduce exposure to ringgit assets initially, before they receive more clarity from the new government, it added.

"We are not bearish [on] MGS in the medium term, especially at the long end of the curve, given that we believe onshore long-term investors will provide support," it said.

It guided for a knee-jerk reaction in the trading of the local currency, due to the short-term uncertainty. In the meantime, cautious sentiment may drive investors to adjust positioning amid heavy long-end supply of MGS and government investment issues (GIIs) in the next two months.

Short-end MGS is closely correlated with forex movements and is less driven by local demand and supply dynamics.

"Near-term uncertainty, broad US dollar strength and higher US treasury yields may weigh on the performance of ringgit debts," it said.

Standard Chartered maintained its neutral short- and medium-term duration outlook as the new 10-year issuance expected in May may still see a healthy local bid, but at higher levels.

Additionally, Standard Chartered said Malaysian investment-grade corporate bond spreads may remain under pressure near-term, and that the 1Malaysia Development Bhd (1MDB) bonds may be impacted by the election results.

Bank Negara Malaysia has declared public holidays on May 10 and 11, following the announcement by the Chief Secretary to the Government Tan Sri Dr Ali Hamsa. Markets are set to reopen next Monday (May 14).