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MGS yields have edged down across tenors, following the US’s reciprocal tariffs announcement, and we anticipate further downward pressure in the near term. Malaysia was hit by harsh US reciprocal tariff rate of 24%, although less severe than other ASEAN-6 peers like Vietnam (46%) and Thailand (36%). We expect Malaysia to be directly negatively hit by the tariffs, considering that the US is amongst its largest goods exports partner, accounting for 13.2% of total exports in 2024 (see ‘Macro Insights Weekly: Asia’s playbook for Trump’s tariff storm’). Malaysia’s small and open economy will also be vulnerable to a global trade slowdown induced by escalating tit-for-tat trade tension.
Even as additional reciprocal rates on semiconductors are exempted for now, Malaysia remains the most directly exposed within ASEAN-6 to any future US semiconductor tariffs, in our view. We estimated, based on data from US trade accounts, that US semiconductor imports from Malaysia accounted for ~4% and ~5% of Malaysia’s GDP and total goods exports, respectively, in 2024, well above the ASEAN-6 average. Considerable trade war-induced downside external uncertainties could prompt Bank Negara Malaysia (BNM) to turn to an easing bias to cushion growth, if domestic demand resilience from sustained private consumption and investments proves insufficient to anchor the economy. MGS 10Y yield spread with UST once narrowed to around -32bps last Friday before returning to -64bps overnight. The spread will likely widen as it prices in the potential for a dovish BNM. On a side note, the government’s continued commitment to narrow the fiscal deficit further to 3.8% of GDP, as outlined in Budget 2025, after achieving 4.1% of GDP in 2024 (outperforming the budgeted 4.3%), should also moderate MGS yields.
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