MYR Bonds Outlook 2H2025: Providing a Shelter Amid Global Uncertainties

In 2025 MYR bonds outlook published earlier this year, we anticipated a slight increase in inflation and projected the Overnight Policy Rate (OPR) to remain steady at around 3% in 2025. However, after a few key events in 1H2025, such as Malaysia’s rising minimum wage and the U.S. "Liberation Day" tariffs, we are reassessing our outlook for the second half of the year.

Malaysia bond space remained resilient in 5M 2025

MYR fixed income market has once again shown its resilience in the first five months of 2025, delivering a 3.51% YTD return (as of end-May) despite global uncertainties arising from U.S. tariff and trade policies. The top performers were EM local currency government bonds (8.94%), Asia-Pacific bonds (7.96%), global aggregate bonds (5.28%), and global high-yield bonds (4.41%), driven by yield compression amid easing monetary policies, particularly in emerging markets.

Looking ahead to 2H2025, we remain optimistic about Malaysia’s fixed income market, which is likely to sustain its solid performance as the country potentially embarks on an easing monetary policy cycle (further details below).

Chart 1: Major fixed income market return (YTD, as of 31 May 2025)

CPI is expected to remain contained despite upward inflationary pressures from fiscal reforms.

Since our last update, the Consumer Price Index (CPI) has declined, edging down to 1.4% YoY as at the end of April 2025, marking its lowest level since February 2021. This decrease was primarily driven by easing cost pressures, particularly in Food and Non-Alcoholic, Recreation and Cultural Services, Furniture and Household Equipment, and Medical Care. Meanwhile, core CPI (excluding volatile items such as food and energy prices) saw a slight increase, rising to 2% YoY.

We anticipate upward inflationary pressure in the near-to-medium term as fiscal reforms are progressively implemented. These include the fiscal consolidation measures outlined earlier, such as the RON95 petrol subsidy rationalisation, electricity tariff hike, and expansion of the Sales and Services Tax (SST). The Malaysian government has announced that the expanded SST and electricity hike will take effect from 1 July 2025. We believe the government will closely monitor the impact to ensure inflationary pressures remain under control before proceeding with the RON95 subsidy rationalisation.

The scope of the SST will be broader than initially expected, encompassing rental and leasing services, construction, finance, private healthcare, education, and beauty services, with rates ranging from 5% to 10%. 

Despite the broader-than-expected scope of the reforms, we view that the inflationary impact will remain moderate and manageable as the tax primarily targets luxury and non-essential goods. This is further supported by the current subdued inflation environment, which provides a buffer against upward pressures. Even with incremental increases, inflation is unlikely to spiral out of control. Overall, these measures align with market expectations, and inflation is expected to remain within a range of 1.5% to 2%.

Chart 2: CPI vs Core CPI (as of 30 April 2025)

Chart 3: Components breakdown

Slower growth in 2025

Malaysia’s GDP recorded a growth of 4.4% in Q1 2025, marginally higher than the 4.2% achieved in the corresponding quarter of 2024 (Q1 2024). This was underpinned by expansion in the services, manufacturing, and construction sectors. Additionally, consumer spending remained resilient, buoyed by multiple festive holidays during Q1, favourable labour market conditions, and the implementation of the new minimum wage.

On a quarter-on-quarter basis, Malaysia’s GDP exhibited softer growth compared to the 4.9% recorded in Q4 2024. This moderation was primarily attributed to a shorter working calendar due to the festive season and heightened concerns about global trade uncertainties.

Looking ahead, we maintain a cautious outlook for Malaysia’s economy, given persistent uncertainties surrounding the tariff war and the outcomes of ongoing negotiations. As an export-dependent economy, Malaysia is likely to face challenges from these headwinds, which are expected to dampen export activity. Furthermore, consumer spending is projected to be more cautious, reflecting upward inflationary pressures (as discussed earlier). Consequently, we anticipate Malaysia’s economic growth to moderate in the near term.

Chart 4: Malaysia’s GDP

OPR cut is not far away

After three Monetary Policy Committee (MPC) meetings this year, BNM has maintained the OPR at 3%. In the latest Monetary Policy Statements (MPS), BNM adopted a more dovish tone, highlighting global headwinds from geopolitical tensions and rising trade policy uncertainties. Although BNM has kept the policy rate unchanged, but it announced a 100-basis point reduction in the statutory reserve requirement (SRR), which we view as a supportive measure for Malaysia’s economy.

The unpredictable tariff scenarios and rising concerns on the US fiscal debt situation has dampened the USD and the Malaysian ringgit has appreciated by 5.3% YTD against the US dollar (as of 10 June).

As we step into second half of the year, due to expectation of slower economic growth (stemming from global trade tensions), coupled with manageable inflation and low unemployment rate, we think that Bank Negara Malaysia (BNM) has room to cut rate.

Expect yields to decline further in 2H2025.

Global trade tensions and looming US tariffs have triggered significant volatility in global equity markets. As shown in Chart 4, Malaysia’s sovereign yields have fallen sharply since mid-April. We view this decline primarily to substantial capital inflows into Malaysia’s bond market. As of end-May 2025, total foreign holdings in Malaysia’s bond market achieved a record high of RM302.1 billion, with the foreign shareholding of Malaysian Government Securities (MGS) increasing to 35.6% from 33.6% in April.

This surge in foreign investment was primarily attributed to growing concerns over persistent uncertainties in global equity markets, with global investors seeking opportunities beyond the U.S., particularly in emerging markets.

Chart 5: Sovereign yield 

We are also of the view that the current MGS yield has not fully priced in the potential rate cut as the decline in yields to date was driven by the capital inflow. There may be potential further decline in yields should BNM decide to cut rate in 2H2025. 

Narrowing fiscal deficit, on track to meet medium-term target

As can be seen in Chart 5, the Malaysian government’s fiscal deficit has seen significant improvement since 2021. In the Budget 2025 announcement, the government outlined a target to further reduce the fiscal deficit to 3.8% in 2025, with an aim to achieve 3.0% over the medium term.

As previously mentioned, several initiatives, including an electricity tariff hike, a broader scope of the Sales and Services Tax (SST), and the rationalisation of RON95 petrol subsidies, are expected to be implemented in the second half of 2025. These fiscal consolidation measures are anticipated to provide the government with additional revenue and reduce financing needs, which may exert downside pressure to MGS yields.

Chart 6: Fiscal Deficit of GDP (%)

*2025 Target

Chart 7 below illustrates government debt issuance, highlighting a noticeable reduction in the first five months of 2025 compared to the same period in 2024. This aligns with the government’s fiscal consolidation efforts aimed at narrowing the fiscal deficit.

Chart 7: Malaysia government debt issuance (RM million)

Continue to favour medium-term

Malaysia's yield curve has maintained an upward slope for the past decade. We view the medium-term segment (5–7 years) as the most favorable, showing the steepest gradient on the curve. As illustrated in Chart X. The 5-7 years segment also provide relatively attractive absolute yields. Additionally, with yields likely to fall further due to potential rate cuts, the 5-7 year tenure also provides capital gain potential.

Chart 8:  Sovereign yield

Tightening credit spread, investors may consider high IG bonds  

The tightening of credit spread, particularly pronounced in the A rated MYR bond space, has made AAA and AA rated MYR corporate bonds to be the better option for investors, as they have not experienced as much spread compression and continue to offer greater stability, making them more favourable from a risk–reward perspective.

Coupled with our view where Malaysia economy may slow down in the second half of the year, there is a potential for credit spreads to reverse and widen. Such a development may result in a potential capital loss scenario. 

Chart 9: Credit spread

Our view

As we enter into the second half of 2025, the Malaysian bond market is expected to remain resilient. While fiscal reforms are anticipated to take place during this period, we believe their inflationary impact will be minimal. That said, Malaysia’s economy is likely to experience slower growth, primarily due to global trade and tariff uncertainties, which are expected to weigh on export activities.

In terms of bond selection, medium-term Malaysian Government Securities (MGS) with maturities of 5-7 years remain a preferred option, offering a good balance between yield and duration. Additionally, investors may consider high investment grade corporate bonds (AA and AAA), as credit spreads have not tightened as much compared to A rated bonds.

We have compiled a recommended list of bond ideas in the table below.

Table 1: AA rated corporate bonds*

Source: BSM, iFAST Compilations. Data as of 19 June 2025.

*Availability subject to market conditions

^Upcoming issuance

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.