Malaysia Bond Yield Environment Enters a New Era

Key Highlights

• MGS yields rose more sharply than UST yields: 7Y–10Y MGS yields increased by 51–52 bps, compared with 38–39 bps for equivalent USTs, reflecting both global yield repricing and additional domestic risk premium.

• Limited room for MGS yields to retrace: Global yield repricing and domestic political uncertainty are likely to keep MGS yields elevated, with further upside risk if global yields rise further or domestic political uncertainty intensifies.

• Foreign demand remained strong: MGS/MGII recorded RM15.9 billion of foreign inflows in August, the third-largest monthly inflow on record, supported by Malaysia’s resilient 6.0% 2Q26 GDP growth and contained inflation.

• Investment view: We continue to favour the 3–5-year segment of the MGS curve. Our base case remains no rate change in 2026.

MGS Yield Rise Driven by Higher UST Yields and Domestic Political Uncertainty

From 2 July to 10 September 2026, MGS yields rose more sharply than UST yields, particularly for bonds with medium to longer maturities. Yields on 7Y–10Y MGS rose by 51–52 bps, compared with a 38–39 bps increase in the corresponding UST tenors (Table 1 and 2). The broad-based increase in UST yields was mainly driven by U.S. inflation is expected to remain higher for longer, driven by sticky inflation and concerns over US fiscal sustainability, which pushed longer-term US Treasury yields higher and also exerted upward pressure on Malaysian government bond yields.

Table 1: Malaysia Government Securities (MGS)

Table 2: US Treasuries (UST)

However, the relatively larger increase in MGS yields suggests that domestic factors have also contributed to the repricing. In particular, heightened political uncertainty following the Johor and Negeri Sembilan state elections in July and August may have led investors to demand a higher risk premium for Malaysian government bonds, contributing to additional upward pressure on MGS yields. The Johor election was held on 11 July, followed by the Negeri Sembilan election on 1 August, with both polls viewed as important indicators of the broader political outlook ahead of Malaysia's next general election.

The increase in bond yields was faster than we had expected, as we initially expected only a modest rise in 2H26. The sharper-than-expected increase was mainly driven by the renewed escalation in the US-Iran conflict, which pushed crude oil prices higher and raised concerns over global inflation. Crude oil prices increased from around USD69 per barrel in July to near USD100 per barrel as of 10 September 2026 (Chart 1). Higher energy prices could keep inflation elevated and reduce expectations for interest rate cuts. This also put upward pressure on bond yields globally, with UST yields rising alongside oil prices. While Malaysia’s domestic inflation remains largely contained, the broader global yield repricing has spilled over into the Malaysian bond market, contributing to higher MGS yields.

As highlighted in our previous article, Malaysia Bond Market Outlook 2H26: Between a Barrel and a Ballot Box

Looking ahead, crude oil futures prices suggest that oil prices could remain elevated at an average of around USD92 per barrel over the next few months (Chart 1), reflecting renewed escalation in the U.S.-Iran conflict. If oil prices remain elevated, this could push inflation higher and put further upward pressure on global bond yields, particularly the UST yield curve, as market participants increasingly price in a higher possibility of a rate hike. This could lead MGS yields to gradually move higher. At the same time, continued uncertainty surrounding Malaysia's political landscape could add further upward pressure on MGS yields.

Meanwhile, BNM’s policy stance remains unchanged, with the OPR maintained at 2.75% in September. We continue to expect BNM to keep the OPR unchanged through 2026, as resilient domestic growth and manageable inflation provide room to remain on hold despite higher global yields and external inflation risks.

Chart 1: US Crude Oil Price Future Indicator

Strong Foreign Inflows into Malaysian Government Bonds in August 2026

Despite the rise in MGS yields, Malaysia Government Securities (MGS) and Government Investment Issues (MGII) recorded strong foreign inflows in August, with net inflows of RM15.9 billion, compared with a net outflow of RM5.6 million in July. The July outflow was driven by renewed U.S.-Iran tensions, elevated oil prices and higher U.S. Treasury yields.

The strong reversal in August marked the third-largest monthly inflow on record and the highest since September 2013, increasing foreign holdings of Malaysian bonds from RM304.2 billion to RM320.1 billion. The renewed foreign demand was mainly supported by Malaysia’s resilient economic growth and contained inflation, with the economy expanding by 6.0% YoY in 2Q2026, exceeding the advance estimate of 5.8%. The strong foreign inflows also suggest that higher MGS yields have not materially weakened investor appetite for Malaysian government bonds. This indicates that the recent yield repricing may be improving the attractiveness of MGS valuations, particularly if Malaysia’s growth remains resilient and inflation stays contained.

Chart 2: Foreign Holding in Malaysia Government Bond

MGS Yield Curve Remains Upward Sloping; Medium-Term (3–5 Years) Favoured

The Malaysian Government Securities (MGS) yield curve remains upward sloping. Compared to one week, one month and three months ago, yields have generally risen across all tenors, although the movement over the past week has been relatively muted. In contrast, the largest increase was observed over the past month, mainly driven by higher U.S. Treasury yields and increased uncertainty surrounding the domestic political landscape as highlighted as above.

Looking ahead, we see little room for MGS yields to retrace lower in 2H26, as global yield repricing and domestic political uncertainty continue to weigh on market sentiment. with risks tilted to the upside. 

Against this backdrop, we prefer the short-to-medium segment of the curve, particularly the 3–5-year tenor. This segment offers an attractive balance between yield and interest-rate risk, allowing investors to capture reasonable carry while maintaining lower duration risk compared with longer-dated bonds.

Chart 3: MGS Yield Curve

All in One

Overall, Malaysian government bond yields have undergone a sharper-than-expected repricing in 2H26, driven by higher U.S. Treasury yields, elevated oil prices and increased domestic political uncertainty. While the recent rise in MGS yields has been more pronounced than in USTs, strong foreign inflows in August suggest that investor demand for Malaysian government bonds remains resilient, supported by Malaysia’s resilience economic growth and contained inflation.

With global inflation risks and domestic political uncertainty likely to persist, we see little room for MGS yields to retrace lower in 2H26, as global yield repricing and domestic political uncertainty continue to weigh on market sentiment with risks tilted to the upside. 

Against this backdrop, we continue to favour the 3–5-year segment, which offers an attractive balance between yield and interest-rate risk, while maintaining a cautious stance on longer-duration bonds.

Further insights, please refer to our previous articles:  Malaysia Bond Market Outlook 2H26: Between a Barrel and a Ballot Box and BNM Maintains OPR at 2.75% in September 2026

Bond Recommendation

We have compiled a recommended list of government bonds of both MGS and MGII, as shown in Table 3. MGS are conventional government bonds, featuring fixed coupons (interest), with the coupon paid semi-annually and maturities ranging from 3 to 5 years. MGII, on the other hand, are the equivalent of MGS but based on Islamic principles.

Together, MGS and MGII are known as Malaysian Government Bonds. Investing in these instruments essentially means lending to the government in exchange for fixed coupon payments until maturity, making them among the safest investment options in the Malaysian market, as they are backed by the government.

For investors seeking corporate bonds within our preferred duration of around 3–5 years, we have also compiled a list of available bonds on our platform, as shown in Table 4. These bonds offer yields ranging from 4.7% to 6.1%.

Table 3: MGS and MGII Bond

Table 4: Available bond in our platform within (3-5 year)