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Oct 19, 2026

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The Malaysian government bond yields declined sharply across the maturity curve following the tabling of Budget 2027, as investors responded positively to the government’s commitment to fiscal consolidation despite higher development expenditure, according to Kenanga Investment Bank Research.

The research house said yields on Malaysian Government Securities (MGS) and Government Investment Issues (GII) fell between 4.2 and 18.1 basis points (bps), supported by improved confidence in Malaysia’s fiscal outlook and a strong rally in US Treasury bonds.

The benchmark 10-year MGS yield declined by 15.2 bps to 3.795%, while the 10-year GII yield fell 14.7 bps to 3.874%.

Kenanga attributed the rally to favourable market sentiment following Budget 2027, which combined higher development spending with a narrower fiscal deficit target.

The government has targeted a fiscal deficit of 3.3% of gross domestic product (GDP) in 2027, compared with an estimated 3.6% in 2026.

The commitment to fiscal consolidation helped ease concerns over debt sustainability and supported demand for Malaysian government bonds.

Budget 2027 Strengthens Confidence In Fiscal Outlook

Kenanga said the positive response to Budget 2027 reflected investor confidence in the government’s ability to balance economic development with fiscal discipline.

The decline in bond yields was particularly pronounced in the middle section of the MGS maturity curve, suggesting stronger demand for medium-term government securities.

The seven-year MGS yield declined by 18.1 bps, significantly more than the 4.2 bps reduction recorded for the three-year MGS.

The research house said the difference indicated that investors were becoming more optimistic about Malaysia’s medium-term fiscal position while remaining cautious about potential interest rate increases.

A sharp rally in US Treasury securities also provided support for Malaysian bonds, contributing to lower yields across the domestic market.

Resilient Economic Data Support Bond Market Sentiment

Kenanga noted that recent domestic economic indicators continued to demonstrate resilience, providing further support for investor confidence.

Malaysia’s unemployment rate declined to 2.9%, while industrial production growth accelerated to 5.0% year-on-year.

Distributive trade sales also increased by 10.5% year-on-year, reflecting sustained domestic consumption and business activity.

The research house said these indicators pointed to relatively firm underlying economic conditions despite continued uncertainties in the global environment.

Meanwhile, Malaysia’s third-quarter 2026 advance GDP estimates were expected to provide further clarity on the country’s growth momentum.

The Department of Statistics Malaysia subsequently reported that the economy expanded by 5.3% year-on-year in the third quarter, exceeding the 5.1% market consensus cited in Kenanga’s report.

Local Investors Drive Government Bond Rally

Despite the decline in government bond yields, foreign investors remained net sellers of Malaysian government securities during the review period.

Kenanga said foreign investors recorded net disposals of RM1.2 billion in government bonds between Oct 5 and Oct 9.

However, foreign investors purchased a net RM2.5 billion worth of Malaysian corporate bonds on a month-to-date basis.

The contrasting flows suggested that the recent rally in government bonds was largely supported by domestic institutional investors rather than foreign buying.

The stronger demand for corporate bonds also indicated continued investor interest in selected Malaysian fixed-income assets.

Markets Price In Potential BNM Rate Hike

Looking ahead, Kenanga expects Malaysian government bond yields to remain range-bound, although shorter-term yields could face upward pressure as investors increasingly anticipate monetary policy tightening.

The research house maintained its forecast for Bank Negara Malaysia (BNM) to raise the Overnight Policy Rate (OPR) in the first quarter of 2027.

It noted that BNM Governor Datuk Seri Abdul Rasheed Ghaffour had signalled room to adjust interest rates as the ongoing conflict involving Iran continued to keep global energy prices elevated.

Higher oil prices could increase domestic inflationary pressures and influence the central bank’s future policy decisions.

According to Bloomberg-compiled market pricing cited by Kenanga, investors were assigning a 76% probability to a BNM interest rate increase within the next six months as of Oct 15.

Kenanga said the relatively smaller decline in three-year MGS yields compared with seven-year securities suggested that the bond market had already partially priced in potential monetary policy normalisation.

West Asia Tensions Remain Key External Risk

The research house identified geopolitical developments in West Asia as the main external risk to Malaysia’s bond market outlook.

Prolonged tensions could sustain higher global energy prices, complicating the inflation outlook and reinforcing expectations of higher interest rates.

Investors will also monitor upcoming domestic inflation and trade figures for further indications of economic conditions and potential monetary policy adjustments.

Kenanga expects MGS yields to remain largely range-bound in the near term, with a mild upward bias at the shorter end of the yield curve as markets continue to factor in the possibility of a BNM rate increase.

Overall, the research house viewed the recent bond market rally as reflecting improved confidence in Malaysia’s fiscal credibility following Budget 2027, although inflation risks and expectations of tighter monetary policy could limit further declines in yields.

Source: Government Bond Yields Drops Sharply As Investors Respond Positively To Budget 2027. (October 17, 2026) businesstoday.com.my. Retrieved from https://www.businesstoday.com.my/2026/10/17/government-bond-yields-drops-sharply-as-investors-respond-positively-to-budget-2027/

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Government Bond Yields Drops Sharply As Investors Respond Positively To Budget 2027

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