Malaysian Government Securities (MGS) and Government Investment Issues (GII) yields declined across most maturities last week as domestic investors stepped up buying ahead of Budget 2027, supported by improving global bond market sentiment and expectations of continued fiscal discipline, according to Kenanga Investment Bank.
The investment bank said government bond yields moved between a decline of 9.4 basis points (bps) and an increase of 1.2 bps across the yield curve, with the benchmark 10-year MGS yield falling 8.3 bps to 3.947%.
Meanwhile, the 10-year GII yield declined by 3.2 bps to 4.021%, reflecting sustained demand for Malaysian government debt instruments.
Kenanga said the rally was largely driven by domestic investors positioning ahead of the national budget announcement, while a modest recovery in global bond markets following strong US Treasury auctions provided additional support.
Buying interest was particularly concentrated in the seven-year to 10-year MGS segment, indicating stronger demand for medium- to long-term government securities.
However, the three-year GII yield edged higher despite robust demand at the reopening of the 3.5-year GII, which recorded a bid-to-cover ratio of 3.02 times.
The investment bank noted that expectations of limited fiscal slippage under Budget 2027 helped anchor investor sentiment, with market participants anticipating that the government would maintain its commitment to fiscal consolidation.
Sentiment was further supported by the World Bank’s upward revision of Malaysia’s 2026 gross domestic product (GDP) growth forecast to 5.1% from 4.4%, driven partly by increased investment associated with artificial intelligence (AI).
Despite the improvement in government bond prices, Kenanga noted that foreign investors continued to reduce their exposure to Malaysian financial assets.
Foreign investors recorded net sales of RM3 billion in Malaysian bonds last week, alongside net outflows of RM800 million from Bursa Malaysia equities.
The equity outflows marked the second consecutive week of net foreign selling, highlighting continued caution among international investors amid global monetary policy uncertainty and geopolitical risks.
Kenanga expects MGS yields to remain supported, with a mild downward bias, as domestic demand and expectations of fiscal discipline continue to underpin the government bond market.
However, the investment bank cautioned that expectations of a US Federal Reserve interest rate hike in December, alongside a potential monetary policy normalisation by Bank Negara Malaysia (BNM) in the first quarter of 2027, could limit the scope for further declines in shorter-term bond yields.
The anticipated policy moves could keep yields at the shorter end of the curve relatively elevated even as longer-dated securities benefit from sustained investor demand.
Overall, Kenanga expects Malaysia’s government bond market to remain resilient, although the direction of yields will depend significantly on Budget 2027’s fiscal targets, domestic economic performance and developments in global monetary policy.
