Elevated yields to stay

MALAYSIA’S government bond yields are likely to stay elevated in the near term as global rates remain under pressure, but the market is expected to retain support from strong domestic and foreign demand.

The ringgit’s stability, contained domestic inflation and Bank Negara Malaysia’s (BNM) policy stance are also set to help limit the extent of any further rise in Malaysian Government Securities (MGS) yields.

RHB Research says Malaysia remains the most resilient sovereign bond market among Asean markets, even as rising US Treasury (UST) yields continue to spill over into regional debt markets.

It forecasts the 10-year MGS yield at 3.8% by end-2026, compared with around 4% currently, while expecting BNM to stay pat on the overnight policy rate (OPR) through 2026.

The view comes amid a changing global rates backdrop.

RHB Research expects one more 25-basis-point hike in December 2026, although it says the balance of risk is skewed towards two hikes, in October and December.

“With no cuts expected in 2027, the higher-for-longer policy stance is now our central scenario, keeping upward pressure on UST yields and Asean sovereigns,” RHB Research says.

The research house forecasts the 10-year UST yield at 4.8% by end-2026, reflecting what it describes as gradual normalisation while inflation risks remain elevated. For Malaysia, however, the domestic backdrop provides some insulation from the global bond selloff.

The 10-year MGS yield has partially retraced from a Sept 14 peak of 4.17% to around 4% as Brent crude oil prices ease.

Even so, it is up 50 basis points year-to-date from 3.5% on Jan 2, putting Malaysia among the investment-grade Asean sovereign markets with relatively large yield increases.

The selloff is broad-based across the curve, with the three-year to 10-year segment seeing increases of 48 to 51 basis points.

RHB Research says the move reflects both UST contagion and the shift in expectations around BNM’s policy stance.

Domestic fundamentals

The longer end has behaved differently.

“The 15-year 30-year long end has lagged, anchored by persistent domestic institutional demand,” RHB Research says.

This demand is an important part of the Malaysia bond story. Foreign investors record RM22.8bil in net bond inflows year to date through Sept 14, while total foreign bond holdings reach RM323.6bil as of Sept 17, it notes.

RHB Research says the V-shaped recovery in foreign holdings from the mid-July trough suggests investors are treating higher MGS yields as an opportunity to buy rather than making a structural exit from the market.

“Strong domestic and foreign demand should cushion the upside on MGS yields,” it says.

DBS Bank also points to Malaysia’s relatively resilient domestic fundamentals, despite pressure from higher global commodity prices and rising US term premiums.

MGS comes under pressure during the quarter as rising US term premiums and renewed tensions in the Middle East drive a broad repricing of duration risk across regional markets.

But Malaysia’s inflation remains contained, helped by fiscal subsidies, a firm ringgit and stable domestic demand.

These factors allow BNM to maintain the OPR at 2.75% last month, although the central bank drops its assessment that the current policy rate is “appropriate”.

DBS Bank expects BNM to remain on hold for the rest of the year, while acknowledging a modest shift towards possible policy normalisation.

A one-off rate increase could come into play if higher commodity prices linked to the Middle East conflict feed through to inflation, or if strong economic growth generates broader demand-pull pressures.

“Despite a modest shift in the balance of risk towards policy normalisation, front-end yields already appear to reflect much of this risk,” DBS Bank says.

That makes the front end an important area for bond investors to watch.

RHB Research expects the MGS curve to flatten further if BNM raises rates, with the three-year to seven-year segment facing sharper repricing while the long end remains supported by institutional demand.

For the coming quarter, RHB Research advocates reducing duration exposure and favouring shorter-dated bonds to limit the impact of potentially higher yields.

It nevertheless says elevated yields across Asean present a medium-term entry point, provided UST yields eventually stabilise.

DBS Bank takes a broader view of the global rates environment and says yields across developed markets are likely to remain buoyant over the coming quarters.

Fiscal concerns, elevated energy prices and increased corporate borrowing are all contributing to upward pressure on government bond yields.

A particularly important factor is the global artificial intelligence (AI) investment boom.

DBS Bank estimates hyperscaler spending at US$700bil in 2026 before rising further in 2027 and 2028. This is already feeding into corporate debt markets, with US investment-grade credit issuance up 45% year to date through August.

“An increase of this size crowds out government bonds, driving core yields higher in the process,” DBS Bank says.

“Taken together, the global backdrop is once again shifting to a higher rates regime,” DBS Bank adds.

External factors

For Malaysia, this leaves global rates as the key external constraint even as domestic fundamentals provide some cushioning. Longer-dated MGS remain particularly exposed to movements in UST yields, rising term premiums and less favourable carry relative to Treasuries.

RHB Research says investors should resist extrapolating the recent bond sell-off indefinitely.

It argues that the inflation, foreign UST selling and US fiscal sustainability concerns driving the global rout are ultimately transitory, while higher yields are improving bond valuations.

“At this juncture, it is important to resist the temptation to extrapolate the sell-off indefinitely,” RHB Research says.

Its end-2027 forecast for the 10-year MGS also stands at 3.8%, with a token 25-basis-point OPR hike pencilled in for the first half of 2027 (1H27) as a normalisation move towards the neutral rate rather than a tightening cycle.

RHB Research also expects Budget 2027 to provide a broadly constructive backdrop for MGS supply, with the fiscal deficit target expected at around 3.5% of gross domestic product (GDP) and government debt-to-GDP anchored at 65%.

For longer-term investors, RHB Research says the higher yields could provide an opportunity to lock in stronger coupon income, although price returns remain dependent on the eventual stabilisation of global rates.

“Coupon carry is now the dominant return driver across all four markets, with price return headwinds likely to persist until UST yields stabilise,” it says.

The research house expects the conditions for a broader Asean bond rally to become clearer once inflation risks are re-anchored and the US Federal Reserve signals a genuine pause, which its forecasts suggest becomes more visible into the 2H27.