A boost for bonds?

INVESTORS may likely find some value by putting money in bonds next year, with favourable macroeconomic and policy conditions expected throughout the year coupled with supportive domestic interest rates.

Experts also reckon with the worst of the global tariff increases behind us – at least for now – the fixed income market will be all the more compelling.

MARC Ratings Bhd chief economist Dr Ray Choy says 2026 is shaping up to be a favourable period for Malaysian bonds.

“Declining global interest rates and steady domestic monetary policy are expected to enhance Malaysia’s relative yield advantage, drawing steady foreign bond inflows,” Choy tells StarBiz 7.

He notes that foreign bond inflows rose to RM6.1bil in November, up from RM4.4bil in October, reversing the RM6.8bil outflow in September.

“These inflows were likely supported by renewed investor confidence following the Asean Summit at the end of October and the emergence of the ringgit as Asia’s best performing currency, appreciating 9.4% against regional peers’ year-to-date as of Dec 12.”

Choy reckons with stable corporate credit spreads, strong domestic fundamentals, and the 10-year Malaysian Government Securities (MGS) yield projected to decline in 2026, the bond market outlook remains supportive.

He does warn that Japan’s gradual shift away from ultra-low interest rates, alongside upward pressure on Japan government bonds or JGB yields, may trigger a partial unwinding of long-standing yen carry trades.

“Such a reversal could generate short-term volatility in emerging market currencies, particularly in economies with sizeable foreign participation in local bond markets.

“While Malaysia’s strong fundamentals mitigate this risk, episodes of currency adjustment linked to Japanese yield dynamics should be expected.

“These bouts of volatility are likely to be temporary and externally driven rather than indicative of domestic weakness,” he adds.

OCBC Bank (M) Bhd head of global markets Stantley Tan concurs with Choy, saying that Malaysia’s economy appears to be in a sweet spot, with moderating inflation and sustained growth. Globally, the worst of the US tariffs threat is also behind us, he notes.

“Domestic conditions continue to be strong with downside risks stemming mainly from external factors.

“Looking ahead to 2026, our in-house model indicates that the ringgit has room to appreciate further, driven by strong economic fundamentals, portfolio re-balancing and improving yield differential, with increasing odds of Bank Negara Malaysia holding the overnight policy rate steady through 2026 even as the Federal Reserve (Fed) cuts its rate.”

In short, well contained inflation and continued fiscal consolidation are expected to provide supportive backdrop for ringgit bonds, he says.

“For patient investors, the periodic dips from headlines-driven selling or profit-taking will present attractive entry opportunities for ringgit bonds,” says Tan.

Choy also says as global interest rates decline gradually, demand for MGS is likely to strengthen, supported by a stable inflation profile and attractive real yield differentials relative to developed market bonds.

“The fixed income outlook is further reinforced by firm domestic growth, clearer fiscal direction and the continued absence of material credit events.

“Corporate credit spreads, which remained narrow in 2025 due to supportive liquidity and measured supply, are expected to remain resilient as economic conditions stabilise.”

Key trends

Some of the key trends that are expected for the year ahead that will impact the fixed income market include the differences in decisions by major global central banks,

Tan notes that differences in monetary policy across major economies will increasingly influence capital flows.

“Unexpected moves by key players such as the Bank of Japan or the European Central Bank could trigger significant volatility, as seen recently with global bond yields reacting to Japan’s policy shifts,” he says.

He also points out that the appointment of the next Fed chair will be a pivotal event with long-term implications.

“The situation remains fluid, and clarity is expected only later in the year.”

Domestically, Malaysia has entered the early stages of the Malaysia Overnight Rate or MYOR transition – a positive development aligning local interest rate markets with global standards.

“This shift is likely to boost liquidity and trading volumes in ringgit-denominated interest rate instruments.”

Persistent geopolitical and trade-related concerns will also continue to shape market sentiment, Tan adds but says investor fatigue toward such headlines suggests markets may react less sharply than before.

MARC’s Choy says as we move into 2026, several trends are likely to shape the Malaysian bond market.

Firstly, lower US Fed rates are expected to enhance Malaysia’s relative yield advantage, improving MGS-US Treasury spreads and supporting steady foreign inflows.

He notes that the Fed has already reduced the upper bound of the funds rate from 4.50% at the start of 2025 to 3.75% by December, reflecting rising unemployment, which increased from 3.5% in 2022 to 4.2% year-to-date through September, and slowing US growth, with real gross domestic product projected to moderate from 2.8% in 2024 to 2% in both 2025 and 2026.

“Looking ahead, the Fed funds rate is expected to settle near 3.25% by end-2026, slightly above the long-run neutral range of 2.50%-3.00%, suggesting room for additional rate cuts over time.

“Domestic interest rates may be cut by just once, as current interest rates are already supportive of robust domestic growth amid manageable inflation.”

Choy adds Malaysia is positioned to benefit from trade diversion, as US protectionist measures remain focused on China.

“Additionally, external demand is expected to strengthen following the upgraded Asean–China Free Trade Agreement 3.0 and the US-Malaysia Reciprocal Trade Agreement, supported by outcomes from the 47th Asean Summit. “

He says these factors should continue to support a healthier current account balance and a stronger ringgit, projected at around RM3.93 to US$1 by mid-2026.

This is a level last seen in 2018.