Ringgit bonds stay resilient

MALAYSIA’S bond market enters the final quarter of 2025 with an air of cautious optimism. Supply is slowing, fiscal reforms are biting, and Bank Negara Malaysia appears set to hold rates steady.

Yet investors remain alert to the interplay between foreign flows, government issuance and the upcoming Budget 2026 announcement.

CIMB Research points out that Malaysia’s fiscal metrics are improving with a series of reforms such as re-targeting energy subsidies, expanding sales and service tax and sugar tax, as well as a phased e-invoicing system to improve transparency and compliance.

The narrowing of the deficit has been tangible: the shortfall shrank by 12% year-on-year to RM47bil in the first seven months of 2025, thanks to revenue growth outpacing expenditure.

CIMB Research believes the country remains on track to hit its 2025 fiscal deficit target of 3.8% of gross domestic product (GDP).

Maybank Investment Bank Group Research (Maybank IBG) echoes the view that the public finances are on firmer ground.

It notes that in the first seven months, revenue grew 5.8% year-on-year (y-o-y) to RM177.1bil, while expenditures rose just 1.6% to RM223.8bil.

The fiscal deficit stood at RM46.7bil, tracking well against the full-year target of RM80bil. Maybank IBG highlights how tax receipts surged by 13% in the first half, led by corporate and individual income tax, while subsidy rationalisation shaved billions off spending.

Supply dynamics

For investors, supply dynamics remain key. CIMB Research calculates that primary market issuance in the third quarter (3Q)amounted to RM53bil, including RM10bil via private placement, across 11 auctions. But demand was patchy, with five of those auctions drawing bid-to-cover ratios below two times.

The brokerage attributes the weaker appetite partly to “a heavy slate of corporate issuance (which begins to ease) [that] also diluted demand for government securities”.

Heading into the 4Q, CIMB Research expects gross supply to fall to RM33bil across seven scheduled auctions.

Longer-dated papers will again dominate, but it sees stronger demand emerging for the shorter five-year and seven-year tranches slated for October and November, respectively.

These shorter tenors may benefit from the repricing of yields higher after markets pared back expectations for more Bank Negara Malaysia (BNM) easing.

Maybank IBG is broadly aligned on issuance expectations, maintaining its 2025 gross Malaysian government securities (MGS) and government investment issuance (GII) forecast at RM168bil.

This would cover the RM80bil deficit, alongside refinancing needs and redemptions.

It does caution that T-bill dynamics could nudge the supply number higher. “If this holds, we may need to add RM6.5bil to our RM168bil gross MGS+GII supply forecast, as net T-bill redemption requires funding from higher net MGS+GII issuance,” it explains.

One area of divergence lies in government-guaranteed bonds.

Maybank IBG observes that gross government-guaranteed bond issuances surged to RM24.6bil as of Sept 26, already up 42% from RM17.3bil full-year 2024. Much of this has been driven by Lembaga Pembiayaan Perumahan Sektor Awam and Malaysia Rail Link.

While it remains uncertain whether the surge reflects genuine funding needs or simply issuance mix, the jump in net government-guaranteed bond supply to RM15.3bil year-to-date is notable.

Sustainable returns

Performance-wise, bond investors have little to complain about. Maybank IBG reports that the total return of ringgit government bonds hit 5.1% year-to-date as of Sept 26, already above the 4.3% full-year in 2024.

With additional coupon accruals, the year could still end around the top end of its 4% to 6% projection. Longer durations have led the pack, delivering over 6% returns in the 10-year plus sector, though the brokerage warns that further rally looks limited in the absence of more rate cuts.

Foreign investors remain a swing factor. Maybank IBG says that foreign net selling exceeded RM5bil month-to-date, more than reversing total inflows of RM3bil in August.

Despite September’s wobble, overseas investors remain net buyers on a year-to-date basis, with RM19bil added in the first eight months. That tally was boosted in the spring when US tariff announcements dented the dollar and lifted demand for ringgit assets.

Looking ahead, the bank flags the planned cap reduction in the GBI-EM Global Diversified Index, which could eventually mean outflows of US$2bil, though the phased adjustment should cushion the effect.

On the domestic monetary side, stability appears the order of the day.

Maybank IBG expects BNM to keep the overnight policy rate unchanged at 2.75% in 2025, and potentially into 2026. Inflation is contained, the labour market remains solid, and loan growth is steady, which means little urgency to move policy again after July’s pre-emptive cut.

CIMB Research also expects BNM to stand pat at the November meeting, aligning the outlook for a quiet policy quarter.

Investors will also be watching Budget 2026, due on Oct 10.

CIMB Research expects it “to balance fiscal consolidation with populist measures, with the fiscal deficit expected at 3.6% of GDP.”

Any tweaks to subsidies, new taxes, or shifts in issuance plans could ripple into market sentiment.

From a returns standpoint, Maybank IBG finds foreign investors in US dollar-unhedged positions have enjoyed the best ride, with gains of 11.3% year-to-date, buoyed by ringgit strength.

Even US dollar-hedged positions, at 6.1%, outpaced local investors. While flows may wax and wane, the fundamental depth of Malaysia’s bond market provides resilience.

For all the talk of fiscal repair and issuance, both houses agree that Malaysia’s bond market is in better shape than a year ago.

Revenue collection is firm, expenditure growth restrained, and reforms are slowly reshaping the fiscal landscape.

Supply is elevated but manageable, while policy stability anchors expectations.

The question is whether demand can keep pace in the months ahead, especially with global markets still adjusting to shifting US trade policy and uncertain Fed timing.