The Relationship Between Macroeconomic Indicators and Bond Yield Spreads in Malaysia

Tan, Mei Ching (2025) The Relationship Between Macroeconomic Indicators and Bond Yield Spreads in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

The purpose of this study is to examine the relationship between selected macroeconomic indicators such as external debt, exchange rate, inflation rates, Gross Domestic Product per capita growth and bond yield spreads in Malaysia, with particular attention to their implications for financial stability and investor confidence. Understanding the dynamics that shape these spreads is critical, especially for emerging markets such as Malaysia, where macroeconomic volatility and external shocks play a significant role. This study uses annual time-series data from 1992 to 2020, a period that includes major economic events such as the Asian Financial Crisis (1997 to 1998), the Global Financial Crisis (2008), and the COVID-19 pandemic (2020). Econometric techniques including unit root tests, Johansen cointegration analysis, and the Vector Error Correction Model (VECM) were employed, supported by diagnostic tests to ensure the robustness of findings. The empirical results indicate that inflation and external debt exert a significant positive influence on bond yield spreads, suggesting that rising price levels and debt burdens increase sovereign risk premiums. Conversely, GDP per capita growth and exchange rate stability are negatively associated with bond yield spreads, implying that stronger economic performance and stable currency conditions reduce borrowing costs and narrow spreads. The findings provide valuable insights for policymakers, investors, and financial institutions. They highlight the importance of maintaining sound fiscal management, effective inflation control, and stable exchange rate policies to foster investor confidence and safeguard Malaysia’s long-term financial stability