Malaysia’s 2Q2025 gross domestic product growth came in at 4.4% (1Q2025: 4.4%), slightly below the advance estimate of 4.5%. Growth was underpinned by the services sector, which expanded by 5.1% (1Q2025: 5.0%). Meanwhile, manufacturing growth moderated to 3.7% (1Q2025: 4.1%), weighed down by heightened tariff-related uncertainties during the quarter while the construction sector sustained double-digit growth at 12.1% (1Q2025: 14.2%).

Malaysia’s July exports grew by 6.8% y-o-y (June: –3.6%), surpassing the pre-pandemic average of 5.7% and signalling renewed optimism in external demand. This improvement was consistent with Malaysia’s manufacturing Purchasing Managers’ Index (PMI), which inched up to 49.7 in July (June: 49.3), nearing the neutral PMI score of 50. Exports to ASEAN and China increased by 8.4% (June: -13.8%) and 6.8% (June: -9.3%) alongside a 46.6% surge in shipments to Taiwan (June: 14.2%), driven by robust demand for electrical and electronics and machinery equipment. Moreover, July’s headline inflation edged up slightly to 1.2% y-o-y (June: 1.1%). Inflationary pressures are expected to remain contained, with headline inflation projected to average 1.7% in 2025 and 1.9% in 2026.

In July, Malaysia recorded net foreign bond outflows of RM5.5 billion (June: -RM5.4 billion) and net foreign equity outflows of RM1.0 billion (June: -RM1.3 billion), bringing total capital market outflows to RM6.5 billion (June: -RM6.7 billion). Foreign holdings of Malaysian Government Securities (MGS)/ Government Investment Issues (GII) declined to 21.1% (June: 21.8%). As of 26 August, markets priced in an 84.1% probability of a 25-bps Federal Reserve (Fed) rate cut in September (vs. 72% pre-Jackson Hole speech), following Fed Chair Jerome Powell’s dovish remarks amid softening US labour conditions. Looking ahead, a Fed rate cut would narrow the US Treasury–MGS spread, easing outflow pressure and shoring up demand for MGS/GII.

MGS have rallied year-to-date (YTD), with yields declining across most segments of the curve. The rally has been underpinned by a benign domestic inflation backdrop, with headline Consumer Price Index averaging 1.4% in 1H2025 (1H2024: 1.8%) and moderating to 1.2% in July from 1.7% in January. Furthermore, dovish policy expectations following Bank Negara Malaysia’s July Overnight Policy Rate cut anchored the front end and encouraged duration extension, as investors shifted into longer maturities to lock in yields ahead of further easing. Sentiment was further supported by the government’s fiscal consolidation strategy and a firmer ringgit which appreciated by 5.7% YTD to 4.21 USD/MYR as of 25 August.

In July, secondary trading volume rebounded by 25.0% to RM172.9 billion (June: RM138.3 billion), reversing the prior month’s slowdown. The rebound was anchored by MGS/GII trading which rose to RM150.1 billion (June: RM119.1 billion). Consecutively, financial institutions’ (FI) corporate bond trading climbed to RM2.7 billion (June: RM1.1 billion) and non-FI corporate bond trading advanced to RM10.6 billion (June: RM6.6 billion) as tighter credit risk premia and the search for spread carry drove demand in a dovish interest rate environment. By contrast, activity in Cagamas and quasi-government trading declined, reflecting a rotation towards liquid sovereign bonds and higher-beta corporates.