Malaysian Bonds Decline This Week on Faster Inflation Outlook

Malaysia’s 10-year government bonds headed for the biggest weekly drop since January on speculation inflation will accelerate from a 32-month high due to rising living costs.

Consumer-price (MACPIYOY) gains will average between 3 percent and 4 percent in 2014, compared with 2.1 percent last year, amid costlier electricity, fuel and sugar, according to a March 19 central bank report. Malaysia should be vigilant on price pressures and stand ready to adjust policy rates if headline inflation remains elevated, the International Monetary Fund said in a statement last month.

“Inflation will probably continue to go up and peak around the middle of the year,” said Winson Phoon, a Kuala Lumpur-based fixed-income analyst at Maybank Investment Bank Bhd., a unit of the nation’s largest lender. “Inflation is probably one of the reasons that investors are bearish on the bond market.”

The yield on Malaysia’s 4.181 percent notes due July 2024 climbed two basis points, or 0.02 percentage point, this week to 4.14 percent as of 10:30 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. It reached 4.15 percent yesterday, the highest level since Feb. 13, and was little changed today.

The ringgit declined 0.4 percent from March 28 to 3.2847 per dollar and was little changed today, data compiled by Bloomberg show.

Swaps Rise

One-year interest-rate swaps reached 3.5 percent this week for the first time since July 2011, signaling investors anticipate the central bank will raise borrowing costs from 3 percent. The benchmark has remained at that level since May 2011 even as inflation quickened to 3.5 percent in February.

Consumer prices advanced after the government trimmed fuel and power subsidies to lower the budget shortfall. Prime Minister Najib Razak will introduce a consumption tax in 2015 and targets a 15.6 percent reduction in subsidies to 39.4 billion ringgit ($12 billion) in 2014 for items such as sugar and cooking oil, according to a finance ministry report released in October.

Twelve of 17 economists surveyed by Bloomberg forecast Bank Negara Malaysia will increase the policy rate by at least 25 basis points this year. It next meets on May 8.

Citigroup Inc. is bearish on Malaysian debt due to broadening price pressures, and “upside risks to yields remain dominant,” strategists including Singapore-based Siddharth Mathur wrote in an April 3 report.

Data due around midday local time today may show Malaysia’s exports increased 10.6 percent in February from a year earlier, after gaining 12.2 percent the previous month, according to the median estimate of economists in a Bloomberg survey. The trade surplus probably widened to 8.9 billion ringgit from 6.4 billion ringgit.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, rose nine basis points this week to 6.66 percent, according to data compiled by Bloomberg. The rate was little changed today.

To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Simon Harvey, Robin Ganguly

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