Malaysian Government Securities (MGS) yields climbed in June as investors reacted to rising US Treasury (UST) yields, persistent inflation concerns and expectations that the US Federal Reserve could resume interest rate hikes later this year, according to MBSB Research.
In its latest fixed income market report, MBSB Research said the benchmark 10-year MGS yield rose three basis points to 3.605% during the month, mirroring movements in the US bond market, where the 10-year Treasury yield increased three basis points to 4.47%.
The research house noted that US Treasury yields experienced heightened volatility throughout June as investors reassessed the interest rate outlook following stronger-than-expected economic data and persistent inflationary pressures.
Early in the month, stronger US labour market data reinforced expectations that the Federal Open Market Committee (FOMC) would maintain a hawkish stance. Those expectations strengthened further after higher-than-anticipated consumer and producer inflation readings, while the Federal Reserve kept its benchmark interest rate unchanged at 3.50% to 3.75% but signalled that further tightening remains possible.
The report said the Fed’s updated “dot plot” showed that half of FOMC policymakers expect at least one 25-basis-point rate hike before the end of 2026, prompting markets to increasingly price in higher interest rates.
Based on CME FedWatch data, investors are now assigning a high probability that the Federal Reserve could raise rates as early as September, with expectations rising further for an October move.
Although easing geopolitical tensions following the formal US-Iran peace agreement briefly softened Treasury yields towards the end of June, renewed concerns over inflation—particularly following stronger Personal Consumption Expenditures (PCE) inflation data—once again pushed yields higher.
MBSB Research expects upward pressure on US Treasury yields to persist, supported by resilient labour market conditions and lingering inflation risks.
“At this juncture, we foresee upside pressures on US Treasury yields to continue given elevated inflation and shifting market expectations, which now price in a higher probability of another rate hike towards the end of the year,” the report said.
The research house also cautioned that investors remain concerned about the United States’ long-term fiscal outlook, with debt projected to reach 134% of GDP by 2035, alongside rising defence expenditure expected to approach US$1.5 trillion by 2027.
Malaysian bond market tracks global developments
Domestically, the MGS yield curve generally moved higher across most maturities during June, reflecting developments in the US fixed-income market.
The 10-year MGS traded within a relatively narrow range of 3.56% to 3.62%, compared with the more volatile US 10-year Treasury, which fluctuated between 4.37% and 4.55% during the month.
Meanwhile, the three-year MGS yield also increased as investors adjusted expectations for interest rates amid a “higher-for-longer” global monetary policy environment.
MBSB Research said foreign investors remained active in the Malaysian bond market despite intermittent outflows earlier in the month.
After initial selling pressure affecting both government and corporate debt securities, foreign investors returned as net buyers, helping lift foreign holdings of Malaysian bonds by RM4.9 billion to RM309.8 billion at the end of June from RM304.9 billion in May.
Foreign ownership of outstanding Malaysian government bonds consequently edged higher to 25.6%, compared with 24.8% a month earlier.
Government bond issuance increases
Malaysia also saw stronger government bond issuance during June, with gross issuance of Malaysian Government Securities and Government Investment Issues (MGS/GII) rising to RM22.5 billion, up from RM13.0 billion in May.
An additional RM3.5 billion of reopening issuances was conducted during the month.
Auction demand softened slightly, with the average bid-to-cover ratio easing to 2.80 times from 2.87 times previously. However, investor appetite remained robust for the 15-year MGS issuance, which attracted a bid-to-cover ratio of 3.26 times, significantly higher than the previous auction’s 2.30 times.
Outstanding government bonds increased marginally to RM1.36 trillion as at end-June.
Higher year-end yield forecast
Reflecting recent market repricing, MBSB Research revised its end-2026 forecast for the 10-year MGS yield upward to 3.56%, from 3.50% previously.
The research house said the spread between the 10-year MGS yield and Bank Negara Malaysia’s Overnight Policy Rate (OPR) has widened to around 80 to 90 basis points, approaching the long-term historical average of 98 basis points recorded between 2015 and 2025.
While Malaysian bond yields are expected to remain sensitive to movements in US Treasury yields amid the Federal Reserve’s higher-for-longer stance, MBSB believes domestic yields could partially retrace as confidence in Malaysia’s fiscal position and economic fundamentals improves.
Nevertheless, the report expects near-term volatility to persist as investors continue monitoring global trade uncertainties, inflation risks, geopolitical developments in the Middle East and evolving guidance from the Federal Reserve.
Corporate bond activity also strengthened during June, with trading volume increasing to RM18.7 billion, the third-highest monthly volume recorded so far this year, compared with RM17.4 billion in May. Yield movements were largely higher across investment-grade corporate bonds, while non-rated securities posted mixed performance across different maturities.
