MGS and MGII: A feasible alternative to fixed deposit

In a pre-emptive move to preserve Malaysia’s economy amidst market volatility, Bank Negara Malaysia (BNM) has on 9 July 2025 lowered the Overnight Policy Rate (OPR) by 25 basis points to 2.75%. Following this, several Malaysian banks have revised their base lending rates and fixed deposit rates downwards, with other banks expected to follow.

While this move is a boon for keen borrowers, it presents a challenge for depositors seeking for stable returns. This brings forth the question, if there is a way for depositors to lock in a desired return, and can Malaysian Government Securities (MGS)/Malaysian Government Investment Issues (MGII) serve as a viable alternative to fixed deposits?

In this article, we’ll explore the ins and outs of fixed deposits and MGS/MGII, and assess whether these government bonds can be a practical substitute for conventional fixed deposits.

Fixed deposit rate tied closely with OPR movement

To begin with, let’s clarify what a fixed deposit is. A fixed deposit is a savings product offered by banks where you place a specific sum of money with the bank for a predetermined period at a fixed interest rate. But what determines the rates offered on fixed deposits?

The fixed deposit rates are essentially closely tied to the OPR. The relationship works like this: when the central bank cuts the Overnight Policy Rate (OPR), it lowers the interbank borrowing rate. As a result, banks have less incentive to offer high fixed deposit rates, since they can borrow more cheaply from the interbank market. Conversely, when the OPR rises, interbank rates increase, prompting banks to raise FD rates to attract deposits as a more competitive funding source.

In short, fixed deposit rate is a function of the OPR. When the central bank moves, FD rates follow. This relationship is illustrated in Chart 1.

Chart 1: Correlation between OPR and deposit rate

What about MGS and MGII

MGS, acronym for Malaysia Government Securities, are conventional government bonds issued by the Malaysian federal government. They pay a fixed coupon (interest), with coupon paid semi-annually, and have maturities ranging from 3 to 30 years. Since they are backed by the government, they are considered one of the safest financial instruments to invest in.

MGII, on the other hand, are the equivalent of MGS that is based on Islamic principles. Like MGS, MGII are fully backed by the government and pay returns semi-annually.

Both instruments are collectively referred to as Malaysian Government Bonds. When you invest in MGS/MGII, you’re effectively lending money to the government, which in return pays you a fixed coupon every 6 months until maturity.

The yield on MGS/MGII is also affected by OPR, but it is also affected by a confluence of other factors, including bond supply and demand dynamic, inflation expectation, fiscal balance, economic outlook and more.

The hidden catch: reinvestment risk

In essence, reinvestment risk asserts that when your investment matures, there’s the possibility of not being able to reinvest at the same (or better) interest rate. This rings true with what we have just witnessed, where fixed deposits rate is adjusted downwards following slash in OPR. Thus, investors who have placed an FD earlier are unlikely to be offered similar FD rate going forward.

Conversely, MGS/MGII allows investors to lock in yield, sometimes for decades if investors invest in longer dated government bonds.

Locking in yield removes guesswork around future FD movements/ Set it and forget it

The main differentiator between fixed deposit and MGS/MGII is that the latter allows investors to lock in yield at the time of investment, which essentially removes guesswork around future OPR decisions and the resulting impact on FD rates. 

Looking at the table below, 12-month fixed deposit rates currently stood at around 3.40% following the recent 25bps OPR cut. While these rates may appear attractive per se, it’s important to note that they are derived based on the prevailing 2.75% OPR. Should further rate cuts occur, which is plausible in a softening economic environment, FD rates may further decline from their current levels.

Unlike FDs, MGS and MGII offer a way to lock in yield for much longer durations, independent of future OPR movements. Current government bond yields are as follows:

Table 1: Comparison between fixed deposit rate and MGS yield to maturity

By investing today in government bonds — for instance, MGS 4.736% maturing in June 2046 — an investor effectively locks in 3.83% in annual yield for approximately the next 25 years. That’s 25 years of income certainty, regardless of where the OPR may move over that period.

Theoretically speaking, the longer the duration of a MGS/MGII, the greater the risks investors are exposed to, as investors would have to think of possibility where the issuer (in this case the government of Malaysia) may not be able to fulfil its obligation. Hence, longer duration bonds typically have higher yield to compensate for the additional risk.

Buying a 25-year bond doesn’t mean you have to hold it for 25 years

However, buying a government bond that matures in 25 years time doesn’t necessarily mean investors have to hold on to the bond for 25 years. This is because government bonds in general are actively traded in the secondary market, with MGS/MGII trading volume in the ten of billions. Hence, liquidity is abundant enough for investors to buy and sell government bonds as and when sought after.

Chart 2: MGS & MGII trading volumes

More than just interest

Moving on to another aspect of buying MGS/MGII, which is capital gain/capital loss. Here’s a simple illustration of how this might occur:

Example:

1) You buy an MGS at RM100 face value, yielding 3.50%.

2) Later, the OPR is cut, yield drops to 3.20%.

3) Existing bonds paying 3.50% are now more attractive.

4) The bond’s market price rises to RM102 — you have a capital gain of RM2 if you sell.

5) Conversely, bond’s market price falls if yield increases, resulting in capital loss if sold before maturity

Historically speaking, in the last 7 OPR rate cuts, there were 5 instances* where bond yield declined in response, although most responded earlier.

Table 2: Yield movement following rate cut, before 1 month and after 1 month

Unlike in the US, where the Fed is monitoring potential inflation spillovers from tariffs, Malaysia’s inflation remains contained at 1.2% year-on-year. Even with the SST expansion starting July and electricity tariff adjustments, we believe inflationary pressures will stay manageable.

It’s also worth noting that the government has previously projected inflation between 2.0% and 3.5% in 2025. This inflation outlook leaves Bank Negara with policy space to pursue further rate cuts if required.

Based on the current level, suppose that there’s additional rate cuts coming that result in a yield drop of 25bps, investors could be seeing a capital gain ranging from 1% to 4%, supplementing the fixed yield investors are already getting.