This article first appeared in Capital, The Edge Malaysia Weekly on September 7, 2026 - September 13, 2026

HIGHER Malaysian government bond yields may be starting to present fresh opportunities for fixed-income investors, but fund managers are still proceeding cautiously as global rates remain volatile and yields could move higher.

A multinational financial services group fund manager who does not want to be named says she is “taking the opportunity to slowly redeploy cash in this higher yield environment” while still keeping some cash as “dry powder” in case the bond market corrects further.

The caution comes as yields on Malaysian Government Securities (MGS) have climbed over the past year amid higher global interest rates, a bigger bond supply and expectations that stronger domestic growth and higher oil prices could eventually revive the risk of rate hikes.

The benchmark 10-year MGS yield stood at 3.915% on Sept 3, compared with about 3.421% a year earlier, while the indicative 30-year MGS yield was at 4.309%, versus around 3.894% last year.

Meanwhile, Bank Negara Malaysia held the Overnight Policy Rate (OPR) at 2.75% in its monetary policy announcement last Thursday. It has remained at that level since it was cut by 25 basis points in July 2025.  

Market experts say the rise in MGS yields reflects a combination of external and domestic factors. Higher long-term US Treasury and Japanese government bond yields have put pressure on MGS, while stronger-than-expected domestic growth, strong corporate bond issuance and scheduled government bond auctions have also pushed investors to demand higher returns.

“Consequently, Malaysia was not immune to the global market sell-off despite Bank Negara Malaysia not being expected to hike in the near term,” Wong Loke Chin, chief investment officer (CIO) of Malaysia fixed income at Principal Asset Management Bhd, tells The Edge.  

Principal Asset Management Bhd is a joint venture between US-headquartered global financial services corporation Principal Financial Group and CIMB Group Holdings Bhd (KL:CIMB).

He adds that stronger-than-expected growth in the first half of 2026, averaging 5.7% in real gross domestic product (GDP) terms, together with robust corporate bond issuance and government bond auctions, have contributed to the repricing.

“We believe the recent correction in the bond market is a healthy repricing rather than a signal of stress, considering Malaysia’s inflation backdrop remains contained, while the OPR at 2.75% is still consistent with supporting sustainable growth and price stability.

“Higher yields do imply a higher cost of borrowing for longer-tenor government and corporate issuers, but they do not necessarily imply that Bank Negara will need to raise rates or that inflation is becoming unanchored. Rather, [it is] a function of the market asking for higher returns for current market uncertainties,” Wong says.

Similarly, MARC Ratings Bhd chief economist Ray Choy says the July 2025 OPR cut was “precautionary rather than recessionary”, prompting investors to reassess the future path of interest rates.

“These developments have contributed to a bear steepening of the MGS curve, particularly at the longer end. The rise in long-term MGS yields should not be viewed as contradictory to OPR stability since July 2025, as the policy rate is not identical to the broader cost of capital. Long-term government-bond yields reflect expectations regarding future growth, inflation, fiscal conditions, government borrowing requirements and risk premia,” he explains.

The economy expanded 6% year on year in the second quarter of 2026, from 5.4% in the preceding quarter, driven by continued domestic demand and robust exports. Headline inflation was 1.8% in July.

Government bonds have faced a sell-off in major markets, with long-term yields reaching levels not seen for years as investors contend with persistent inflation risks, large fiscal deficits, heftier sovereign issuance and renewed expectations of monetary tightening.

Last week, US 10-year Treasury yields climbed towards 5%, while Japan’s benchmark 10-year government bond yield touched 3% for the first time since 1996. Bond yields have also risen sharply in the UK, Germany and other major markets.

“The sharp rise in global bond yields reflects investors reassessing inflation risks, policy expectations and the growing supply of government debt across major markets. While markets are increasingly pricing the possibility of additional policy tightening, we believe higher long-term yields also reflect structural factors such as elevated issuance, ongoing fiscal financing needs and a rise in term premium,” Principal Asset Management US’ managing director of global fixed income and portfolio manager on select strategies Mike Goosay says in a note last Wednesday.

MARC’s Choy says the recent MGS repricing was mainly influenced by global developments.

“While global developments remain the dominant driver of rising long-term bond yields, domestically, stronger GDP growth, resilient labour market conditions, record levels of investment and the market’s belief that Bank Negara may eventually normalise rates towards more neutral settings have exerted upward pressure on yields.

“However, Malaysia is ultimately part of a global capital market. Investors compare MGS against US Treasuries, Bunds (German government bonds) and other sovereign bonds. When US yields rise because of stronger growth, higher inflation risks, rising fiscal deficits or larger Treasury issuance, MGS yields are typically pulled higher through portfolio allocation decisions and yield-spread adjustments. In fact, recent upward revisions to our MGS yield forecasts were driven predominantly by the hawkish repricing of Fed (US Federal Reserve) expectations and a firmer US dollar, and partly by strong economic conditions in Malaysia, which could encourage a reallocation away from safe-haven MGS and towards higher-risk assets.”

Foreign investor flows can further amplify these movements, particularly as overseas investors assess Malaysian bonds on a total-return basis, which includes both yields and currency movements.

In its Aug 28 Bond Weekly Outlook report, Kenanga says foreign investors increased holdings of Malaysian debt securities by RM3.6 billion the week ending Aug 21, providing some support for local bonds, while foreign institutions recorded RM549.1 million of net equity outflows.

“We have observed that foreign investors tend to buy more aggressively in anticipation of the ringgit strengthening, a decline in global bond yields, a more dovish US Fed, an improving fiscal position in Malaysia and attractive real yields relative to regional peers,” says Wong.

“On the other hand, foreign investors could reduce holdings if geopolitical risks trigger broader risk-off behaviour, or if Malaysia’s fiscal outlook deteriorates. A hawkish US Fed will potentially result in some selling pressure while currency volatility remains a key swing factor because foreign investors assess Malaysian bonds on a total-return basis,” he points out.

In its Sept 2 Bond Market Update report, MARC Ratings revised its end-2026 10-year MGS yield forecast to 3.75%-3.85% from 3.60%-3.70%, with the yield for 2027 projected at 3.85%-3.95%.

The rise in MGS yields matters beyond just investors holding government bonds because MGS are a benchmark for the pricing of corporate bonds and sukuk.

When government bond yields rise, companies issuing new debt or refinancing existing borrowings may also have to pay more, depending on movements in their credit spreads.

“At current levels, we believe yields are relatively attractive for investors targeting government bonds and high-quality investment-grade credit. Nonetheless, we would still advocate a measured approach rather than aggressively locking in duration all at once. There remains a risk that yields could move higher if US 10-year Treasury yields rise further, if fiscal concerns intensify or if larger-than-expected domestic bond supply needs to be absorbed at wider levels,” Wong says.

For governments, higher yields also raise the cost of issuing longer-dated debt and can increase future debt servicing obligations.

Choy cautions, however, that the rise in yields should not be read simply as a sign that Malaysia is facing an inflation problem or that an OPR hike is imminent. The move also reflects stronger growth, higher global rates, increased bond supply and investors demanding more compensation for holding long-dated debt amid heightened uncertainty.

As the government prepares to table Budget 2027 on Oct 9, bond investors will be watching to see the country’s fiscal direction.

The fiscal deficit is projected at 3.5% of GDP this year, down from 3.8% in 2025, as the government continues its medium-term consolidation programme.

Choy notes that investors are currently not demanding significantly higher yields because of concerns over Malaysia’s fiscal position, which “remains broadly stable”. Instead, the focus is on whether fiscal consolidation remains credible while Putrajaya continues to fund investment and development spending.

“In Budget 2027, investors should focus on the fiscal deficit trajectory, debt-to-GDP trends, the sustainability of subsidy reforms, progress in broadening government revenue sources, and capital expenditure allocation towards productivity-enhancing investments.Markets are generally willing to finance borrowing that supports long-term growth and productivity. The key question is whether future economic returns justify the additional debt burden,” he observes.

For bond investors, the concern is whether any widening in the fiscal gap will translate into heavier government borrowing and additional MGS supply, potentially adding further upward pressure on yields.

Despite the risks, current yields are beginning to look more attractive for investors seeking income.

Choy says they need not necessarily wait for the precise peak in yields before extending duration and highlights that ongoing periods of higher yields provide opportunities to gradually extend duration.

“Nonetheless, duration risk, coupled with capital erosion risk due to higher yields, remains relevant amid rising sovereign credit risk. Global fiscal deficits remain elevated, sovereign bond issuance continues to increase, and investors are demanding greater compensation for inflation, geopolitical and fiscal risks. In addition, the ongoing repricing of US rates could continue to transmit into global bond markets.”

The unnamed fund manager believes value has emerged in certain sections of the MGS curve following the rise in yields, but is adding exposure gradually rather than trying to call the exact top in the market.

Similarly, Goosay sees the global repricing as improving the longer-term opportunity set for fixed-income investors. “Higher yields are enhancing both income and return potential, creating opportunities that have been largely absent for much of the past decade. For long-term investors, periods of market repricing can often present attractive entry points, particularly when economic and credit fundamentals remain as resilient as they do today.”

Principal sees value in areas including investment-grade corporate credit and selected securitised assets, while allowing for exposure to high-yield and emerging-market debt where yields compensate investors for the additional risks.

That said, Goosay cautions against treating today’s higher yields as justification for buying indiscriminately. “At the same time, we acknowledge spreads across many risk sectors remain tight, reinforcing the case for selectivity rather than broad risk-taking. In our view, the opportunity today is less about making a directional call on rates and more about identifying sectors and issuers that can continue to generate attractive income while navigating a backdrop of higher yields, evolving policy expectations, and increasing market dispersion. As fixed-income markets become more differentiated, active security selection is likely to play an increasingly important role in driving investor outcomes.”

Meanwhile, Wong says Principal Asset Management is maintaining a defensive stance for now while gradually adding duration through government bonds and quality credits with strong cash flows and balance sheets, supported by Malaysia’s resilient growth, benign inflation and continued fiscal consolidation.

He says the firm will turn more cautious if growth and inflation surprise on the upside, US Treasury yields rise sharply or fiscal risks worsen, while a “clearer slowdown in global growth and easing inflation expectations would encourage us to add duration more aggressively”.

Meanwhile, the ringgit will remain another important variable for the bond market as currency movements can influence foreign demand for MGS. External pressures from Middle East tensions, elevated oil prices, a stronger US dollar and higher global bond yields could keep the currency volatile in the near term, although Malaysia’s strong exports, current account surplus, resilient growth and sustained foreign direct investment should provide some medium-term support. 

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