Global investors’ retreat from Malaysian debt may ease, supported by the country’s relatively healthy finances and efforts to ease inflationary pressures, market participants said.
Foreign funds have sold a net $1.4 billion worth of Malaysian bonds so far in July, the most since October 2024, data compiled by Bloomberg show. It’s also by far the largest such outflow in Asia except China, where data after March are unavailable.
Aberdeen Group Plc. and Oversea-Chinese Banking Corp. are among institutions that expect the trend to taper off in the coming months. The Southeast Asian country’s relatively benign inflation - at 1.9% - and investment-grade credit profile are among reasons for optimism.
"We do not see a significant or sustained selloff in Malaysian government bonds as our base case,” said Fesa Wibawa, investment manager at Aberdeen.
"Over the longer term, we expect yields to remain relatively well anchored, supported by contained inflation, a credible policy framework and a strong domestic investor base.”
Malaysian sovereign debt has been among Asia’s most resilient since the Iran war broke out at the end of February, with its benchmark 10-year yield rising by 22 basis points, compared with a jump of at least 80 basis points for its Indonesian and South Korean counterparts. A strong economy and government pledges to keep a narrow fiscal deficit, as well as the advantage of being a net oil exporter are supporting the bond market.
The heavy foreign outflow this month, during which the 10-year yield has climbed about 10 basis points, partly reflected some investors’ move to price in a sooner-than-expected interest rate hike on the back of a robust economy, according to T. Rowe Price Group Inc.
Malaysia’s gross domestic product rose 5.8% in the three months through June from a year earlier, according to the country’s advance estimates, beating first-quarter expansion of 5.4% and analysts’ median estimate. The nation’s central bank chief said Tuesday that the economy is poised to grow at the upper end of the 4%-5% official forecast for this year.
Bank Negara Malaysia has left its benchmark interest rate unchanged since cutting it to 2.75% a year ago. While the country’s growth outlook has prompted some to expect the central bank to turn more hawkish, the majority of economists in a Bloomberg survey expect it to hold the policy rate through at least 2027.
The energy-producing country has less dependence on oil and gas imports than neighbors like the Philippines. Price pressures have remained contained, with inflation easing to 1.9% in June, helped by fuel subsidies that have cushioned the impact of higher global crude prices.
"We are constructive on inflows in the medium term given Malaysia’s decent credit rating, while Malaysian Government Securities are included in key bond indices,” said Frances Cheung, head of foreign exchange and rates strategy at OCBC.
The nation carries a long-term local-currency sovereign credit rating of A from S&P Global Ratings, with an A3 grade assigned by Moody’s Ratings.
While Second Finance Minister Datuk Seri Amir Hamzah Azizan flagged in June the possibility for Malaysia to miss its fiscal deficit targets for 2026 due to the Iran war, he said authorities remain determined to bring the shortfall below 3% of GDP by 2028.
"We expect the fiscal deficit to be at 3.6% of GDP in 2026, versus the 3.5% target,” said Brian Tan, an economist at Barclays Bank Plc.
"Given that the degree of fiscal slippage is likely to be only slight, we doubt this would be particularly problematic for the economy or financial markets.”
To be sure, while a boom in AI-related investment and resilient electronics exports have so far helped cushion the economy against external shocks, a protracted conflict in the Middle East remains a risk for some. M&G Investments, for one, sees a small risk of tighter monetary policy later this year should higher oil prices lead to more persistent inflationary pressures.
Still, the market’s fundamentals point to a resumption of appetite among global investors for analysts including ANZ Banking Group’s senior Asia rates strategist Jennifer Kusuma.
"We expect foreign demand for ringgit-denominated government bonds to stabilise in the second half of 2026, as we continue to see constructive local dynamics such as contained inflation supporting the market,” Kusuma said. - Bloomberg
