Malaysian Bonds Fall, Swaps Climb to 2008 High on Policy Bets

Malaysia’s three-year government bonds declined while interest-rate swaps climbed to the highest level since 2008 after the central bank signaled it may raise interest rates for the first time in three years.

The yield on the 3.394 percent sovereign notes maturing in March 2017 rose 13 basis points today and 14 basis points this week to 3.52 percent in Kuala Lumpur, the highest for a benchmark security of that maturity since July, data compiled by Bloomberg show. The one-year swap climbed 10 basis points to 3.61 percent, a level last seen in 2008, signaling investors predict at least a 50 basis point increase in the key rate. The contracts were at 3.25 percent six months ago.

The central bank said in a statement yesterday that it may need to adjust the degree of monetary policy accommodation to avoid a broader build-up in financial and economic imbalances. Bank Negara Malaysia kept its overnight policy rate at 3 percent for the 18th straight meeting, as expected by 18 of 20 economists in a Bloomberg News survey.

“The rate swaps are rising on bets that Bank Negara could be raising interest rates soon,” said Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore. “Our house view is that the central bank may hike borrowing costs 25 to 50 basis points in the second half.”

One-month non-deliverable forwards gained 0.8 percent yesterday following the central bank’s comments, which came after spot-market trading had closed. The contracts touched 3.2230 per dollar today, the strongest since April 10, data compiled by Bloomberg show, before falling 0.2 percent to 3.2334, trimming the weekly advance to 1.2 percent.

The ringgit appreciated 0.3 percent today to a one-month high of 3.2277 per dollar and gained 1.2 percent for the week, the biggest five-day rally since April 11.

Consumer Prices

Bank Negara has kept borrowing costs unchanged since May 2011, even as consumer prices surged 3.5 percent in March and February, the fastest pace in more than two years.

The central bank “sent a strong signal that rate hikes are on the cards in view of the firmer growth prospects, above-average inflation, and the signs of continued build-up of financial imbalances,” Julia Goh, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur, wrote in a research report yesterday. She revised her year-end policy rate target to 3.25 percent from 3 percent.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, decreased six basis points, or 0.06 percentage point, to 5.97 percent today and dropped 35 basis points this week.

Malaysia 10-year government bonds fell, with the yield on the 4.181 percent July 2024 securities climbing eight basis points to 4.07 percent, according to data compiled by Bloomberg.

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