Ringgit rally, fiscal strength fuel Malaysia’s bond momentum

Strong domestic demand and an anticipated export recovery after a US trade deal also position the economy for growth.

A key driver for bonds’ performance is the ringgit, which has led Asian currencies in 2025.

KUALA LUMPUR:

 Malaysia’s improving fiscal outlook, moderating inflation and resilient currency are enhancing the appeal of its bonds, positioning them for continued gains into next year.

Global funds poured about US$1.3 billion into Malaysia’s corporate and government bonds in November, the largest inflows since May, according to Bloomberg-compiled data. Citigroup Inc, Fidelity International and State Street Investment Management are among the major institutions voicing confidence in these assets.

Such views underscore Malaysia’s steady momentum, setting it apart from Southeast Asian peers weighed down by political turbulence and fiscal concerns. Despite US tariff pressures, deficits remain contained and the ringgit continues to rally. Strong domestic demand and an anticipated export recovery after a US trade deal also position the economy for growth.

“It’s difficult to find any negatives in Malaysia’s fundamental story right now,” Rohit Garg, a strategist at Citigroup, said, explaining the firm’s overweight position in the country’s bonds and currency.

“Good steps in terms of fiscal consolidation enhance its macro attractiveness.”

Malaysia’s bonds have delivered robust returns this year, with a Bloomberg index showing gains of about 14% for dollar‑based investors, the strongest performance in emerging Asia. In contrast, local equities recorded an outflow of US$271 million in November, marking the ninth month of net withdrawals out of 11 this year.

A key driver for bonds’ performance has been the ringgit, which has led Asian currencies in 2025 and is hovering near its strongest level against the dollar since 2021.

For foreign investors without currency hedges, a stronger ringgit boosts returns on Malaysian bonds. Expectations of a US rate cut in December may weaken the dollar and lift the ringgit further, adding more support for Malaysia’s assets.

Fiscal discipline is another factor. This year’s deficit is expected at 3.5%–3.6% of GDP, as the government may cancel year-end bond auctions and potentially cut supply, according to Winson Phoon, head of fixed‑income research at Maybank Securities. This would undershoot the government’s 3.8% target.

For 2026, the government has set a deficit target of 3.5%.

The government’s fiscal performance has consistently aligned with its annual targets, Andrew Wood, sovereign analyst at S&P Global Ratings, said.

Maybank projects Malaysian bonds to offer total returns up to 5% in 2026 to ringgit investors, following a 5.4% return so far this year, according to Bloomberg bond indexes.

“We expect the bond market to be well supported” as supply in the coming year won’t be a concern given the government’s fiscal management, said Kheng Siang Ng, Asia Pacific head of fixed income at State Street Investment Management, who started his career as a portfolio manager at Malaysia’s central bank three decades ago.

Real rates

Malaysia’s bonds are also supported by attractive valuations, with inflation‑adjusted yields holding at elevated levels.

Economists surveyed by Bloomberg expect Bank Negara Malaysia to keep policy rates unchanged in 2026, but subdued inflation – just 1.3% in October – has lifted real rates to 145 basis points. That’s nearly one standard deviation above its five‑year average, according to Bloomberg calculations.

“Malaysia will be a rising star in the region’s local currency bond markets in 2026,” Belinda Liao, portfolio manager at Fidelity International, wrote in a note.

“Strong domestic investment, coupled with a stable political and economic environment, is expected to attract more foreign capital.” - FMT