PETALING JAYA: Malaysia Government Securities (MGS) are expected to remain well supported in the second half of financial year 2026 (2H26) as easing oil prices, a narrower fiscal deficit and a lighter government bond supply outlook underpin demand, according to CIMB Research.
It maintained its forecast for the benchmark 10-year MGS yield at 3.55% to 3.70% for 2H26, saying any election-related volatility would likely present buying opportunities rather than derail the broader market outlook.
An analyst said he remained slightly bullish on Malaysian government bonds in 2026, expecting the 10-year MGS yield to ease further to around 3.30% by the end of the year, underpinned by continued fiscal consolidation, stable inflation and sustained demand from domestic institutional investors.
CIMB Research said the government’s improving fiscal position had strengthened confidence that planned MGS issuance would remain manageable despite elevated subsidy spending earlier this year.
“We keep our 10-year MGS yield forecast of 3.55% to 3.70% for 2H26.”
It added that the unchanged MGS/GII supply outlook, led by easing oil prices, should keep the three and 10-year curve anchored around 35 basis points (bps) to 40 bps.
While election-related uncertainties could temporarily steepen the yield curve, the research house expects such moves to present opportunities to position for subsequent curve normalisation as political uncertainty recedes.
The more constructive outlook follows a marked improvement in the federal government’s fiscal position in May.
Malaysia’s fiscal deficit narrowed to RM6.3bil from RM12.1bil in April, supported by stronger revenue collection and lower expenditure.
Government revenue rose 10.9% month-on-month and 9.8% year-on-year (y-o-y) to RM30.4bil, while expenditure declined 7.1% from April, although it remained 19.5% higher than a year earlier.
Lower RON95 petrol and diesel subsidy payments, estimated at around RM4bil in May compared with RM4.9bil in April, contributed to the improvement.
For the first five months of 2026, however, the cumulative fiscal deficit still widened 5% y-o-y to RM35.5bil, equivalent to 1.7% of gross domestic product.
Even so, revenue collection reached 40.3% of the full-year target, ahead of the historical average pace, while expenditure remained broadly in line with long-term trends.
CIMB Research expects fiscal pressures to ease further as crude oil prices retreat to around US$70 to US$75 per barrel, helping reduce fuel subsidy commitments over the coming months.
However, it cautioned that RON95 petrol and diesel subsidies in the first five months of the year had already exhausted the government’s RM15bil allocation for the whole of 2026.
Despite the subsidy risks, the research house believes the government’s commitment to maintaining a non-negative current balance will help keep the fiscal deficit close to its 3.5% of gross domestic product target.
It also maintained its gross MGS/GII issuance forecast at RM185bil for 2026.
It noted that demand for government bonds remained resilient despite the heavy issuance calendar in May and June, with seven consecutive auctions recording a weighted average bid-to-cover ratio of 2.6 times.
Looking ahead, July is expected to see negative net MGS/GII issuance of RM5bil following RM20bil in MGS maturities.
“Any additional subsidy costs would largely need to be offset by expenditure rationalisation and/or stronger revenue collection,” the report said, although it acknowledged fiscal policy could become more accommodative as Malaysia approaches the next general election.