Corporate issuance poses headwinds for Malaysian sovereign bonds

[KUALA LUMPUR] Malaysia’s sovereign bonds are facing fresh headwinds from seasonally heavy corporate debt issuance, just as fading rate cut bets strain the market.

A measure of demand for sovereign bonds at auctions fell to the lowest this year in September on signs that Bank Negara Malaysia (BNM) may keep interest rates on hold this year. A seasonally strong slate of corporate bond sales towards year-end threatens to further erode demand for government debt as investors choose notes with higher yields.

“Bids turned subdued in the absence of more rate cut prospects and competing supply from more high-grade private debt security issuances,” said Winson Phoon, head of fixed-income research at Maybank Securities.

He expects the bid-to-cover ratio at government bond auctions for the remainder of the year to average below that of the first half, as corporate bond issuance tends to be back-loaded.

The average bid-to-cover ratio of the two government bond sales in September, a 2028 conventional bond and a 2054 Islamic note, stood at 1.93 times. That’s the lowest on average on a monthly basis in 2025.

A potential increase in corporate debt issuance towards year-end is emerging as a key risk for the market. Over the last three years, issuance of such bonds increased by 50 per cent on average in the final three months of the year compared with the previous quarter, according to data compiled by Bloomberg.

Yields in the secondary market have already risen from a four-year low touched in early August as traders pared back expectations of further rate cuts, with the central bank leaving its policy unchanged earlier this month. BNM governor Abdul Rasheed Ghaffour said last week that the current monetary stance is “appropriate” and that growth will get a boost from a “pre-emptive” rate cut made in July.

Ringgit swaps are now pricing eight basis points of easing over the next six months, from as much as 20 basis points in mid-August. The central bank is expected to keep interest rates unchanged at 2.75 per cent to 2026, according to a median of economists surveyed by Bloomberg.

The reduction of Malaysian bonds’ weight in JPMorgan’s flagship emerging-market index adds another layer of risk for the market.

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However, T Rowe Price Group continues to prefer Malaysian government bonds. “We like Malaysia bonds due to its deep, local market with very strong institutional support for the curve,” said Shaoyu Guo, an emerging market sovereign fixed-income analyst at the firm.

Traders are likely to keep a close watch on the upcoming corporate bond supply to gauge its impact on sovereign debt. Investors may be lured by higher returns from corporate bonds, with Malaysia’s top-rated five-year company debt offering a premium of 50 basis points over government bonds of the same tenor. BLOOMBERG