KUALA LUMPUR (July 8): Malaysia’s government bond issuance may slow in the next six months as the government keeps a lid on borrowings to meet its narrower budget deficit planned for the year.

Gross issuance is expected to moderate to RM64 billion-RM90 billion in the second half of 2025, according to fixed-income analysts. The combined issuance of Malaysian Government Securities (MGS) and Government Investment Issues (GII) stood at RM91 billion in the first six months, data compiled by The Edge Malaysia showed.

“We expect supply pressure to ease considerably, with lower gross reopening and constrained new issuance,” said Kenanga Investment Bank head of economic research Wan Suhaimie Wan Mohd Saidie.

Foreign holdings saw their biggest surge ever and hit a fresh record high of RM282.4 billion in May, equivalent to 22.5% of total government bond outstanding, latest available data showed. The government issued RM175 billion worth of MGS and its Islamic counterpart GII in 2024.

Demand, meanwhile, appeared healthy judging from recent auctions. Bid-to-cover ratios, the amount of orders placed by investors relative to the available amount, averaged close to three times.

Malaysia’s domestic institutional investors “have huge absorption capacity”, said Areca Capital chief executive officer Danny Wong. “Any renewed offshore interest would only strengthen demand.”

Structurally, Malaysia is a high-savings nation with a broad and deep investor base, comprising mostly large institutional investors such as the Employees Provident Fund to anchor demand, said RAM Rating Services Bhd senior economist Woon Khai Jhek.

Malaysia is aiming to narrow its long-running budget shortfall as a proportion of economic output to 3.8% this year from 4.3% last year.

Under Budget 2025, allocation for development spending will decline slightly to RM85 billion. Under Malaysia’s fiscal laws, MGS and its Islamic counterpart GII are issued only for financing developmental expenditure.

“The government should be able to meet its fiscal deficit target,” said Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

Malaysia has recently lowered subsidies for electricity and broadened its sales and service tax (SST) regime. The government has committed to rationalisation of its subsidy for RON95, the most widely-used petrol variant, before the end of 2025.

The focus is now shifting towards monetary policy with economists split ahead of Bank Negara Malaysia's July 9 review.

A Bloomberg survey as of Monday showed 11 out of 23 economists calling for a 25 basis-point cut to the overnight policy rate (OPR) — the first move since May 2023, potentially ushering in an easing cycle. The rest expect another pause.

“The downside risks for bond yields are visible,” said Afzanizam. “But traders remain cautious, especially given fluid inflation expectations. This may limit how aggressively they extend portfolio duration, despite the downward bias in interest rates.”

When interest rates fall, new bonds are issued with lower returns, raising the appeal of existing bonds that carry higher rates. That, in turn, lifts prices of bonds already in the market, lowering their yield.

Bond yields have already begun to reflect this policy shift, and may be shifting lower with “a more pronounced fall at the long end than at the front end”, RAM’s Woon added.