Kuala lumpur: MBSB Investment Bank Bhd (MBSB IB) has revised its 2025 projection for the 10-year Malaysian Government Securities (MGS) yield to end the year at around 3.40 percent, following the recent overnight policy rate (OPR) cut.
According to BERNAMA News Agency, the investment bank noted that MGS yields predominantly moved higher last month, with the most notable increase at the 10-year tenor, which rose by 21 basis points to 3.37 percent in August 2025.
The 10-year MGS has fluctuated within a narrow range between 3.36 percent and 3.39 percent, showing stability after the decline observed in July, particularly following the OPR cut. MBSB IB remarked that the current compressed spread between the MGS and OPR, ranging around 50 to 60 basis points, is expected to persist. This is a lower-than-average spread, which suggests that the market is anticipating another OPR cut this year.
Following the latest Bank Negara Malaysia (BNM) rate cut in July, MBSB IB highlighted that the differential between the OPR and the United States Federal Funds Rate (FFR) has widened. The bank projects this gap will continue in the near term. While their forecast does not include any additional OPR cuts for the rest of the year, they anticipate the US Federal Reserve will persist with its policy adjustment of lowering the FFR.
MBSB IB explained that the divergence in policy setting will lead to a gradual decrease in the interest rate differential, an essential component of their market outlook. Consequently, the bank expects the OPR-MGS spread to normalize as market participants respond to the reduced likelihood of another OPR rate cut.
The bank noted several key developments set to fortify the MGS market and enhance investor confidence, such as the government’s decision to expand the sales and service tax in July 2025, reflecting a commitment to fiscal improvement. This move is further supported by the 13th Malaysian Plan, which aims to reduce the fiscal deficit to below 3.0 percent of GDP by 2030. Combined with domestic consumption support from a recent mini-stimulus package and the latest OPR cut, these measures create a conducive environment for increased MGS inflows.
Additionally, MBSB IB suggested that investors will closely watch Malaysia’s upcoming 2026 Budget announcement. Despite concerns about the impact of higher tariffs and potentially weaker external demand, Malaysia’s growth fundamentals remain strong, aided by stable and manageable inflation and resilient domestic demand.
The bank also stated that a potential delay in Fed rate cuts, a consistently strong US dollar, and renewed inflationary pressures could maintain current MGS yield levels in the short term. Furthermore, it mentioned that futures market trends currently indicate an additional Fed rate cut, with three cuts expected in each remaining meeting for the year, starting in September 2025.
MBSB IB concluded that while potential downward pressure on US Treasury yields could lead to lower MGS yields, the impact may be limited due to the recent weaker sensitivity between the two markets. Therefore, close monitoring of these factors is vital for the Malaysian debt market outlook.