Standard Chartered expects Malaysian Government Securities (MGS) yields to decline gradually in 2027, supported by continued fiscal consolidation under Budget 2027 and stronger reinvestment demand from domestic institutional investors, although global interest rate pressures and inflation risks could limit gains.
The bank maintained its Neutral duration outlook on ringgit-denominated government bonds, projecting the benchmark 10-year MGS yield to ease to 3.8% by the end of the second quarter of 2027 before declining further to 3.7% by year-end.
However, Standard Chartered revised both forecasts upwards from its earlier projection of 3.4%, reflecting elevated global bond yields, inflationary pressures and relatively expensive valuations in the Malaysian government bond market.
In its rates strategy report following the Budget 2027 announcement, the bank said the government’s continued commitment to fiscal consolidation should help contain gross government bond issuance despite a modest increase in net supply.
“We maintain a Neutral duration outlook on MYR bonds. Bond technicals should remain relatively supportive in 2027 as continued fiscal consolidation keeps gross issuance contained despite a modest increase in net supply,” it said.
Government Bond Issuance Projected At RM181.3 Billion
Based on the financing requirements outlined in Budget 2027, Standard Chartered expects Malaysia’s net government bond supply to increase slightly to approximately RM79.5 billion in 2027 from RM76.3 billion in 2026.
The increase largely reflects lower bond maturities, with total MGS and Government Investment Issues (GII) redemptions projected to decline to RM101.8 billion from RM109.7 billion in 2026.
Despite the higher net supply, gross bond issuance is expected to ease to RM181.3 billion in 2027 compared with RM185 billion in 2026.
Standard Chartered estimated that MGS issuance would amount to approximately RM100.3 billion, while GII issuance would total RM81.3 billion.
Net supply is expected to remain broadly balanced between conventional MGS and Islamic government securities, at around RM40 billion each, consistent with previous years.
The bank also expects the public-to-private issuance split to remain unchanged at 81% and 19%, respectively.
Stronger Domestic Demand Expected In Second And Third Quarters
Standard Chartered expects technical conditions in the Malaysian government bond market to become more favourable during the second and third quarters of 2027, supported by sizeable bond maturities and increased reinvestment activity.
Government bond redemptions are expected to be concentrated in May, September and November, creating periods of lighter net supply between May and July, as well as September and November.
The bank said these maturity schedules could encourage domestic institutional investors to reinvest proceeds into government securities, providing support for bond prices and helping to lower yields.
Local banks are expected to remain focused on shorter-dated government securities, particularly maturities of three to five years, amid sustained domestic credit and loan demand.
Meanwhile, the Employees Provident Fund (EPF) is expected to remain a major source of demand for longer-dated government bonds, particularly securities with maturities of 10 years and above.
Standard Chartered noted that the EPF accounted for approximately 56% of the increase in ringgit government bond holdings during the first half of 2026, while local banks contributed around 18%.
This strong domestic institutional participation is expected to remain an important stabilising factor for the bond market in 2027.
BNM Rate Hike, Global Bond Yields Pose Near-Term Risks
Despite its expectation of lower government bond yields over the longer term, Standard Chartered remains cautious about the near-term outlook.
The bank expects Bank Negara Malaysia (BNM) to raise the Overnight Policy Rate by 25 basis points at its November Monetary Policy Committee meeting, reversing the central bank’s pre-emptive monetary easing undertaken in 2025.
It cited firmer underlying inflation, elevated global oil prices and higher global core bond yields as factors that could weigh on Malaysian government securities.
Potential political uncertainty ahead of Malaysia’s anticipated general election in the first quarter of 2027 was also identified as a near-term risk in the bank’s assessment.
Additionally, Standard Chartered noted that Malaysian government bonds remain relatively expensive compared with US Treasuries.
The yield spread between 10-year MGS and 10-year US Treasury securities is currently near historical lows, potentially limiting additional demand from international investors.
Although foreign investor positioning in Malaysian bonds remains relatively light, the bank said tight yield spreads could constrain further inflows until valuations become more attractive.
Standard Chartered believes the government’s continued efforts to narrow its fiscal deficit will provide a supportive backdrop for the bond market by limiting the amount of new debt issuance required.
The bank expects the combination of contained gross issuance, substantial bond maturities and sustained demand from domestic investors to support government securities as 2027 progresses.
However, it cautioned that the scope for further yield declines would remain dependent on global monetary conditions, domestic inflation developments and investor appetite for Malaysian fixed-income assets.
Overall, Standard Chartered maintained its Neutral stance on MGS duration, expecting the 10-year government bond yield to decline gradually towards 3.7% by the end of 2027.
The bank sees the second and third quarters as particularly favourable periods for the Malaysian bond market, when stronger reinvestment demand and lighter net bond supply could provide additional support to prices.
