US tariff deal and higher Fed rate cut prospects to lift market sentiment, arresting continued foreign funds outflow

Published on 19 Aug 2025.

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The Malaysian bond market for a second consecutive month in July saw a net outflow of foreign funds (RM5.5 bil; June: RM5.4 bil), led by the selloff of MGS and GII (RM5.3 bil; June: RM5.3 bil). The sustained weakness in foreign demand was in line with the subdued market sentiment last month amid uncertainties over a trade deal with the US as the 1 August deadline for higher reciprocal tariffs loomed. The US Federal Reserve’s (Fed) hawkish stance at the July Federal Open Market Committee meeting, where the policy rate was kept at a restrictive 4.25%-4.50%, also contributed to the muted demand.

That said, the recent reduction in US tariffs on Malaysian goods to 19% from 25% and the growing likelihood of a Fed rate cut amid a softer than expected US inflation print should help bolster foreign appetite and drive a return of foreign inflow into Malaysian bonds this month. While foreign selling persisted in the first week of August, with foreign holding falling to RM287.3 bil as at 6 August from RM291.1 bil as at end-July, it has since rebounded back to RM291.1 bil as at 12 August amid improved foreign investor sentiment. Market bets on Fed rate cuts also helped drive the ringgit’s appreciation to 4.22 against the USD as at 18 August from 4.25 as at end-July. The 10-year UST yield fell to 4.34% as at 18 August from 4.37% as at end-July, while the 10-year MGS yield remained steady at 3.38% over the same period. This narrowed the UST-MGS yield differential to 96.2 bps as at 18 August (end-July: 99.3 bps), improving the appeal of ringgit bonds to foreign investors.

Markets are widely expecting the Fed to trim the federal funds rate by 25 bps in September to a target range of 4.00%-4.25%, with the market-assigned probability of a cut having increased to 85% on 15 August from about 38% as at end-July, according to CME FedWatch Tool data. Markets are also banking on at least one other rate cut in October or December, which will help further turn the yield differential more favourably towards Malaysian bonds and, in turn, increase the attractiveness of Malaysian assets.

 

Analytical contact Woon Khai Jhek, CFA  (603) 2708 8286 khaijhek@ram.com.my		Media contact Sakinah Arifin (603) 2708 8212 sakinah@ram.com.my
Nur Rasyidah Abd Karim (603) 2708 8208 rasyidah@ram.com.my

 

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