Malaysian bonds lagged behind other emerging Asian markets in August, experiencing substantial foreign outflows. In July alone, foreign funds sold a net $1.4 billion (RM5.72 billion) worth of Malaysian bonds, marking the largest outflow since October 2024 and the most significant in Asia outside of China. Total foreign holdings of Malaysian debt declined to RM304.2 billion in July from RM309.8 billion in June, with foreign ownership as a proportion of total outstanding debt falling from 13.2% to 12.9%. These outflows were primarily concentrated in longer-duration government securities, particularly Malaysian Government Securities (MGS), which saw RM7.4 billion in outflows in July, compared to RM3.4 billion in June. Government Investment Issues (GII) also registered a smaller RM400 million outflow.
The underperformance was attributed to several factors, including a heavy August supply calendar for Malaysian government bonds, which led to investors reducing exposure to longer-duration securities. The 20-year yield for MGS moved above 4%, and the 30-year yield stood at 4.16% as of August 7. Renewed US-Iran tensions, higher oil prices, and elevated US Treasury yields also prompted investors to reduce duration exposure. The 10-year US Treasury yield surged by 31 basis points month-over-month to 4.75% by end-July, widening the yield gap with Malaysian Government Securities (MGS) to nearly 100 basis points from 80.0 basis points in June, making US fixed-income assets more attractive.
Despite these challenges, some institutions like Aberdeen Group plc and Oversea-Chinese Banking Corp anticipate the outflow trend to taper off. Analysts from Aberdeen believe a significant and sustained sell-off in Malaysian government bonds is not the base case, expecting yields to remain relatively well-anchored due to contained inflation, a credible policy framework, and a strong domestic investor base. Malaysia's sovereign debt has shown resilience, with its benchmark 10-year yield rising by only 22 basis points since the Iran war, significantly less than the 80 basis points seen in Indonesian and South Korean counterparts. This resilience is supported by a strong economy, government pledges for a narrow fiscal deficit, and its status as a net oil exporter.
While foreign investors were net sellers of MGS and GII, there was continued interest in shorter-term government papers and corporate bonds. Malaysian Treasury Bills (MTB) attracted RM1.4 billion in inflows in July, extending their foreign buying streak. Corporate bonds and Sukuk also saw inflows, easing slightly to RM800 million. The Overnight Policy Rate (OPR) remained stable at 2.75%, and a fixed-income trader noted that while near-term volatility and yield concessions are expected for longer-dated MGS, especially around large auctions, opportunities to gradually accumulate duration will arise once US rate expectations stabilize. The overall outlook for Malaysia's fixed-income market remains cautiously constructive over the medium term due to resilient growth, contained inflation, and attractive real yields.
