In 4Q2024, Malaysia’s economy started on a strong note, with October’s Industrial Production Index expanding by 2.1% (Sep: 2.3%), driven by a 3.3% growth in the manufacturing sector. Private consumption remained robust, as indicated by a year-to-date increase in passenger vehicle sales, supporting an overall economic growth forecast of 5.1% for 2024.

Globally, the US and eurozone are expected to follow different policy rate paths. The US Federal Reserve (Fed) signalled limits to rate cuts due to persistent inflation (Dec: 2.7%; Nov: 2.6%), projecting only two rate cuts in 2025, while market-implied European Central Bank (ECB) rate cuts remain higher at four to five, supported by slower economic growth and lower inflation. We forecast Malaysia’s inflation to rise to a manageable 2.6% in 2025 (2024F: 1.9%), and we expect Bank Negara Malaysia to maintain its overnight policy rate at 3.0%.

Following Trump’s electoral win in November, foreign outflows in the local capital markets continued. However, although outflows in equities increased to RM3.0 billion (Oct: -RM1.8 billion), foreign outflows from the bond market tapered down to RM1.1 billion (Oct: -RM10.9 billion).

The global bond markets showed divergence, with US Treasury (UST) yields increasing significantly by 17 to 36 basis points (bps) due to a hawkish Fed, while Chinese government bond yields fell by 25-32 bps to record lows following pledges for looser monetary policy. However, further downward movement in Chinese government bond yields may be limited, as the market appears to have priced in the potential rate cuts.

In Malaysia, government bond yields trended similarly to the USTs, albeit at a smaller magnitude, increasing by 1-7 bps, while corporate bonds’ yield trends were mixed. Consequently, the 5-year blended corporate credit spread dropped and government-guaranteed corporate bonds outperformed Malaysian Government Securities.

In 2025, the number of Malaysia’s government bond auctions is expected to remain at 36 (2024: 36; 2023: 37), with a greater emphasis on long-term tenors (15y-30y), accounting for half of the total auctions. As the government continues its fiscal consolidation efforts, gross issuance of Malaysian government bonds is projected to decline to RM163.5 billion (2024: RM176.7 billion), while net issuance is forecast to drop to RM80 billion (2024: RM82.0 billion), the lowest since 2021.