Malaysian Government Securities (MGS) and Government Investment Issues (GII) yields moved higher this week as escalating geopolitical tensions in the Middle East fuelled concerns over energy-driven inflation and pushed global bond yields upward, according to Kenanga Research.
In its latest fixed income market update, the research house said MGS and GII yields increased between 0.3 basis points (bps) and 9.1 bps during the week.
The benchmark 10-year MGS yield rose 5.1 bps to 3.688%, while the 10-year GII yield gained 3.2 bps to 3.665%.
Kenanga attributed the upward movement primarily to higher global bond yields, as continued tensions between the United States and Iran, alongside persistent concerns over the Strait of Hormuz, kept crude oil prices elevated and revived inflation worries.
Rising US Treasury and UK gilt yields also weighed on the domestic bond market, prompting investors to reassess interest rate expectations.
Despite the external headwinds, the research house noted that gains in local yields were moderated by Malaysia’s resilient economic fundamentals.
It pointed to stronger-than-expected second-quarter GDP growth, easing consumer inflation in June and export growth reaching a 46-month high as factors supporting investor confidence.
Kenanga also said expectations of increased government assistance under the Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA) programmes should continue to underpin domestic consumption and economic activity.
On market flows, Kenanga reported that foreign investors remained net sellers of Malaysian government bonds, recording RM4 billion in net outflows last week.
However, sentiment towards the equity market remained more positive, with foreign institutions extending their buying streak for a second consecutive week, posting RM600 million in net inflows.
Looking ahead, Kenanga expects Malaysian bond yields to remain mildly biased upwards as geopolitical developments in West Asia continue to influence oil prices, inflation expectations and global fixed income markets.
Reflecting the more challenging external environment and higher global yields, the research house has revised its third-quarter 2026 forecast for the 10-year MGS yield to 3.70%, up from its previous estimate of 3.43%.
Its fourth-quarter 2026 forecast has also been raised to 3.63%, compared with the earlier projection of 3.40%.
Investors are expected to closely monitor next week’s US Federal Open Market Committee (FOMC) meeting and the Bank of Japan’s policy decision for further guidance on the global interest rate outlook.
Domestically, attention will also turn to Malaysia’s upcoming Producer Price Index (PPI) release, which is expected to provide additional insights into underlying inflationary pressures.
