- Malaysia’s 2025 macroeconomic landscape moderately supports fixed income, with headline inflation easing to a four-year low of 1.4% YoY in March to April due to subdued food and fuel prices and continued subsidies. Core inflation is slightly higher, but full-year estimates of 2.2–2.7% suggest contained price pressures despite some upside risks from subsidy reforms and wage hikes. Economic growth moderated to 4.4% YoY in Q1 2025 from 5.0% in Q4 2024, largely from weaker exports and mining output, though domestic demand remains robust, private consumption rose ~5% aided by income gains and wage hikes, while capital imports surged 114% in April, pointing to ongoing infrastructure investment. GDP growth for 2025 is expected to remain in the 4.0–4.5% range.
- On the fiscal side, the government is targeting a federal deficit of 3.8% of GDP in 2025, down from 4.3% in 2024. New tax measures and the phasing out of blanket subsidies are expected to aid consolidation. Malaysia’s debt-to-GDP ratio is projected to decline to around 63%. The Fiscal Responsibility Act passed in 2023 is a structural step toward reducing deficits below 3% and improving debt governance, which supports investor confidence. Government bond issuance (MGS/GII) is expected to drop to RM155–165 billion from RM176.7 billion last year, reducing supply pressure.
- As for the monetary policy, BNM has kept the Overnight Policy Rate (OPR) at 3.00% since May 2023. While it maintained this rate in its May 2025 meeting, it unexpectedly cut the Statutory Reserve Requirement (SRR) from 2% to 1%, injecting RM19 billion in liquidity. Though framed as a liquidity measure, markets view this as a dovish signal.
- BNM has acknowledged downside risks from weaker global trade and commodity output. With inflation low and growth risks rising, economists expect a possible rate cut of 25–50 bps in late 2025, contingent on Q2 GDP and inflation data. The next monetary policy meeting in July aligns with the expiry of the US-China tariff truce, making it a key inflection point. The SRR cut gives BNM flexibility to support credit without altering the policy rate immediately.
Stable Sovereign Bond and Bull-steepening Yield
- Malaysia’s government bond market has shown resilience in early 2025, with yields largely stable to slightly lower aid global volatility. In April, Malaysian Government Securities (MGS) yield fell across the curve, led by short and mid-tenor declines of 12-15 bps, as investors priced in potential monetary easing.
- The bull steepening yield curve indicates strong demand at the front end and expectation of rate cuts, while the long end yield fell modestly. The 10-year MGS hover around 3.6% in May, down from about 3.7% in April. Front end saw larger yield drop year to date, anchoring the short-term rate near 3.0% policy rate. Given this steeper yield curve, two feasible yield curve strategies include: increase the longer duration bond exposure which result in a higher yield to maturity overtime; another is ‘repo-carry’ trade (borrow cash and use it to buy long-maturity bond), which can be profitable if the bond coupon rate surpasses the cash financing cost.
- The Vasicek model projects the 10-year MGS yield to mean-revert upward toward approximately 3.7% by 2026, reflecting historical rate behaviour under assumptions of constant volatility and stochastic shocks. This is consistent with the existing macroeconomic narrative: despite currently subdued inflation and a moderate slowdown in growth, structural reforms, resilient domestic demand, and ongoing infrastructure investment are likely to maintain upward pressure on long-term yields.
- Sovereign bond performance has been supported by robust local demand and returning foreign interest. Domestic institutions (banks, pension funds, insurers) continue to provide a stable bid for government securities, as evidenced by strong auction demand and active secondary market trading. April recorded a RM10.2 billion bond inflow which is the largest monthly bond inflow since mid-2023. This renewed foreign appetite was spurred by a more dovish U.S. rate outlook and a temporary U.S.-China tariff truce that improved risk sentiment. As a result, non-resident holdings of Malaysian government bonds (MGS + GII) edged up to about 21.5% of outstanding securities by end-April (up from 20.9% in March).
Corporate Credit Market Spreads, Issuance Trends, and Sentiment
- Malaysia’s corporate bond and sukuk market has broadly tracked movements in the sovereign yield curve, with credit spreads narrowing in early May (most notably in the lower-rated segments such as AA and A). Meanwhile, high-grade and quasi-sovereign issuers remained in favour, showing only modest spread compression. The narrowing spreads reflect a partial easing in global risk aversion; however, investors have grown more selective amid ongoing concerns over trade dynamics and global growth. Despite this cautious positioning, overall credit conditions remain stable: AAA-rated and government-linked issuers continue to attract strong demand, while default rates remain low, underpinned by resilient economic performance and ample banking system liquidity.
- Issuance activity has been healthy. In 2024, corporate bond and sukuk issuance hit a record RM124.2 billion (up 5% YoY), led by banks and the real estate sectors. For 2025, RAM Ratings expects issuance in the RM110 to 120 billion range, still strong though slightly below last year’s peak. Q1 2025 saw moderate issuance, with RM14.5 billion in January, as some issuers awaited clearer interest rate direction. Demand for sukuk remains high, comprising about half of new issues.
- In the secondary market, April saw lower trading volumes, reflecting investor caution. Yet primary offerings from strong credits continue to be oversubscribed, with insurers, pension funds (e.g., EPF), and local asset managers acting as core buyers. Foreign participation in corporate bonds remains limited, most foreign flows target government securities, making the market less exposed to FX-driven volatility. If macro conditions stay stable (e.g. 4-5% GDP growth, moderate inflation), credit fundamentals should remain intact. Spreads may tighten as global risks ease, though risk-off sentiment could persist for lower-rated credits in the near term.
Our Take
- Malaysia’s macro picture continues to evolve in ways that build on the themes we highlighted in our earlier note in April 2025. Inflation remains under control, domestic demand is holding up, and the country’s policy direction is supportive for both fiscal consolidation and monetary flexibility. At Cordoba Capital, we’re staying engaged across both government and corporate bonds, focusing on the 7-10-year part of the curve while also leaning into credits tied to long-term infrastructure and tech development. Our allocation strategy balances exposure to steady income with selective opportunities to capture upside as Malaysia’s reform story unfolds. We see this as a multi-year opportunity where patient investors can ride out short-term volatility and benefit from the market’s gradual recognition of Malaysia’s improving fundamentals.
Continue reading our research
To continue reading the full note and explore the complete body of our work, visit the Research Library.