Narrowing yield spreads and greater Fed rate cut prospects to spur continued foreign fund inflows this month

Published on 22 Sep 2025.

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Foreign investors returned as net buyers of Malaysian bonds in August after two consecutive months of outflows. The fund inflow was driven mainly by purchases of MGS and GII amounting to RM3.3 bil. The renewed interest was partly supported by the narrower differential of 82.9 bps between the 10-year UST and MGS yields compared to 99.3 bps as at end-July. This followed a notable decline in the 10-year UST yield (end-July: 4.37%; end-August: 4.23%) as markets priced in growing rate cut prospects. Improved market sentiment following the reduction in US reciprocal tariffs on Malaysian exports, from 25% to 19%, also helped bolster foreign investor demand.

Foreign investor appetite for Malaysian bonds is expected to remain healthy this month, supported by the US Federal Reserve’s (Fed) 25 bps interest rate cut at its September Federal Open Market Committee meeting. Further easing projected for 4Q – with the Fed’s dot-plot indicating another 50 bps reduction in interest rates by the end of 2025 – will likely continue to support foreign appetite for emerging market debt. This will turn the interest rate differential further in favour of Malaysian bonds, already seen in the decreased 10-year UST-MGS yield spread which averaged around 66 bps last week.

Given the hotter than anticipated August inflation print and ongoing labour market concerns, we expect the Fed to follow through with its plan to deliver at least a cumulative 50 bps interest rate reduction by year end. As the likelihood of an aggressive cut is still low, we see the Fed favouring a more gradual approach with a 25-bps cut in October and another 25 bps in December. Markets also price the federal funds rate finishing the year at 3.50%-3.75% (current target rate: 4.00%-4.25%), with the market-implied probability at roughly 80% as of 21 September, according to CME FedWatch. 

 

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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