Bond inflows to sustain

PETALING JAYA: Appetite for Malaysian debt securities is seen to be sustained on a strong and favourable outlook, anchored mainly by expectations of potential cuts to the United States’ interest rates.

Foreign interest into the local debt market is spurred by heightened expectations of rate cuts by the US Federal Reserve (Fed) of as much as 75 basis points (bps) in the near to medium term.

For now, the majority of forecasts appear to be expecting a third consecutive interest rate cut of 25bps in the coming US Federal Open Market Committee (FOMC) meeting tomorrow.

This would bring the United States interest rate down to the 3.5% to 3.75% level from 3.75% to 4%.

This explains why fund flows into the local debt market have seen a turnaround in recent times – as Malaysia recorded a second consecutive month of foreign debt portfolio inflows in November, with net inflows having surged to RM4.9bil from RM1.7bil in October.

A similar picture is also seen in the wider emerging markets (EM) debt flows whereby inflows have shown strong momentum for most of this year.

In the local context, the potential closing of the yield differential gap between the United States and Malaysia could mean heightened foreign interest in the local bond market being sustained in the months to come.

Asset management firm Tradeview Capital’s founder and chief executive officer Ng Zhu Hann said a rate cut at the coming FOMC meeting is almost a foregone conclusion, noting that this is being reflected in asset prices today, including bonds.

“On investor’s minds is now contemplating on whether it will be the widely expected 25 bps cut or a 50bps reduction instead.

“The market has factored in a 25 bps cut, hence we had seen the recent strengthening of the ringgit versus the US dollar,” Ng told StarBiz.

“There is still some room to go before this rate differential with the United States closes.

“Now the United States interest rates are still higher than the rates here in Malaysia. If there is a bigger cut in the United States this would expedite fund flows towards this part of the world,” he added.

Ng expects Bank Negara Malaysia (BNM) to continue to stand pat with regard to interest rates in Malaysia – namely, for the overnight policy rate to be sustained or unchanged at present levels of 2.75% for the foreseeable future.

He noted the US dollar to Malaysian ringgit exchange rate is at a ‘comfortable’ level now – at RM4.11 to a dollar.

Commenting on local fund flows, Ng said foreign money appears to be attracted to the debt markets now, rather than the equity market.

“We continue to see healthy demand in the debt markets but the only concern is the equity market as selling has persisted for the large part of the year since the tariff wars in April.

“It is still an unanswered question if there would be a turnaround on this front since fund outflows have persisted for some time.

“Logically, we should see some reversal but there has been no momentum as year-to-date (y-t-d) outflows is above RM20bil,” he said.

The foreign portfolio inflows in November were driven entirely by the largest non-resident purchases of Malaysian debt securities in six months of RM6.1bil versus RM4.4bil in October, UOB Research said.

“Heading into 2026, capital flows into EMs, including Malaysia, are expected to stay firm, supported by anticipated Fed rate cuts, a softer US dollar, and stronger EM growth prospects.

“Recent trade agreements and a temporary US-China truce for one year have eased geopolitical risks and trade uncertainty, providing near-term tailwinds. Combined with domestic growth drivers, these factors will position Malaysia as an attractive destination for capital inflows,” UOB Research noted.

In the y-t-d period until November, the research house noted foreign portfolio inflows totalled RM2.3bil, down from RM4.8bil in the same period last year.

Malaysia debt securities inflows last month were primarily underpinned by robust foreign buying of Malaysian Government Securities (MGS) of RM5bil and Private Debt Securities (PDS) including private sukuk in November, which gained RM2.1bil.

This helped to cushion the non-resident selling of Government Investment Issues (GII) of minus RM1.1bil and Treasury Bills of minus RM0.03bil last month, UOB Research noted.

Pursuant to these developments, foreign ownership of MGS has now risen to 33.9% while for PDS this is at 2.2% and GII’s foreign holdings was at 8% in November.

“In addition to external tailwinds, domestic growth drivers — strategic plans under the 13th Malaysia Plan and Budget 2026, low inflation, credible monetary policy, ongoing fiscal reforms, and cross-border initiatives such as the Johor–Singapore Special Economic Zone — are also expected to position Malaysia as an attractive destination for capital inflows,” UOB Research said.

It noted the factors above with the improving current account surplus and stronger foreign reserves will further underpin the outlook for the ringgit moving forward.

“We project the ringgit to appreciate to 4.09 against the dollar by mid-2026 and 4.05 by end-2026,” it said.

Meanwhile, Kenanga Research said demand for Malaysian bonds is likely to stay firm in the near term, as the Fed is expected to cut rates by around 75 bps in the coming six months and weaker US economic data will likely nudge investors toward more stable markets.

Malaysia remains one of the better positioned emerging markets, supported by strong macro fundamentals, Kenanga Research said.

“Domestically, solid growth prospects, a stable sovereign rating outlook and BNM’s decision to maintain the policy rate at 2.75% have anchored confidence. “Strengthening bilateral trade links and expectations of a firmer ringgit further enhance the appeal of Malaysian debt. Structural reforms and a renewed commitment to fiscal discipline reinforce this support,” it noted.