Malaysian government bond yields are expected to retain an upward bias in the near term, with Kenanga Research pointing to higher global rates, renewed oil-price pressures and rising domestic term premiums ahead of Budget 2027.
The research house said Malaysian Government Securities (MGS) and Government Investment Issues (GII) yields rose sharply across the curve last week, increasing by between 11.3 basis points and 24.5 basis points.
The 10-year MGS yield climbed 21.5 basis points to 4.134%, while the 10-year GII yield rose 23.1 basis points to 4.153%.
Kenanga attributed the sell-off roughly equally to global and domestic factors.
On the external front, rising US Treasury and UK gilt yields pushed global fixed-income benchmarks higher, while escalating tensions in West Asia sent oil prices sharply higher and added to inflation concerns.
Domestically, the sell-off was more pronounced at the long end of the curve, causing the 3-year/10-year yield spread to steepen.
Kenanga said the curve movement appeared to reflect a rise in term premium rather than a repricing of monetary policy expectations, as investors demanded higher compensation ahead of expected debt supply surrounding the tabling of Budget 2027 in October.
Despite the rise in yields, demand for Malaysian government debt remained reasonably healthy.
A recent Malaysian Government Investment Issue auction recorded a bid-to-cover ratio of 2.29 times, while softer July industrial production data reinforced the view that the domestic growth backdrop remains uneven.
Foreign investors also remained supportive of the local bond market, registering RM0.9 billion in net inflows into Malaysian bonds last week.
This contrasted with the equity market, where foreign institutions recorded net outflows of RM640.3 million from Bursa Malaysia.
Kenanga expects local yields to remain under upward pressure heading into the US Federal Reserve’s September policy meeting.
However, it sees scope for yields to retrace should the Fed keep rates unchanged, as the current premium attached to a possible rate hike unwinds.
The research house said domestic investors would also closely monitor Malaysia’s labour market and retail sales data this week, followed by trade and inflation releases next week for further clues on growth and price pressures.
Kenanga has revised its third-quarter 2026 forecast for the 10-year MGS yield to 3.95% from 3.70%.
It also raised its end-2026 forecast to 3.88% from 3.63%.
The upward revisions reflect what Kenanga sees as persistent pressure from escalating West Asia tensions, higher oil prices and the resulting repricing in global interest rates.
Overall, the research house expects bond-market volatility to remain elevated in the short term, but believes some of the recent rise in yields could reverse if the Federal Reserve stops short of another rate increase.
