(June 18): Traders remain sanguine about Malaysia’s financial outlook even after officials warned the government may miss its deficit target this year, according to a closely watched financial-market metric.
The so-called bond-swap spread that tracks the difference between interest-rate swaps and government bond yields for Malaysia is positive 12 basis points, whereas similar gauges are negative for many regional economies including Thailand, South Korea and India.
A positive swap spread suggests investors see less fiscal and issuance risk. This occurs because government bond yields react more strongly to the outlook for debt supply than interest-rate swaps do.
“Malaysian bonds have been very well behaved compared to peers, and even as fiscal slippage risks exist, are likely to be less severe than others,” Gordon Goh, a strategist at Citigroup Inc in Singapore, wrote in a research note last week. “This should leave bonds on a better footing versus swaps.”
The nation’s 10-year bond yield is currently 3.58%, compared with a rate of 3.70% on a Malaysian ringgit-denominated interest-rate swap of the same maturity.
The government may not meet its fiscal deficit targets for 2026 as the Iran war drives up the cost of fuel subsidies, Finance Minister II Datuk Seri Amir Hamzah Azizan said on June 9. “If I end up at the end of the day, slightly short of the targets, it’s OK,” he said in an interview on Bloomberg Television, referring to the 2026 fiscal deficit target of 3.5% of gross domestic product (GDP).
The minister’s confidence was supported by investors at a bond auction three days later. The RM3.5 billion (US$860 million) sale of 2040 Islamic securities drew bids of 3.41 times the amount offered, the second-highest bid-to-cover ratio this year.
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“Structurally resilient local real-money demand continues to anchor the Malaysia government bond curve,” said Winson Phoon, head of fixed‑income research at Maybank Securities in Singapore. Bond yields are likely to continue trading below interest-rate swaps over the near term, he said.
Malaysia’s economy has remained relatively insulated from the impact of elevated energy prices because of the nation’s status as a net oil exporter. Since the start of the Iran war, Malaysia’s 10-year bond yields have risen by around nine basis points, the smallest increase in emerging Asia after China.
“We expect fiscal discipline to remain intact and the government to stay committed to its medium-term deficit target of 3% of GDP,” Maybank’s Phoon said. “Therefore, ringgit bond supply risk remains manageable and should not be a key headwind for the curve.”
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