Malaysian Bonds, Ringgit Drop This Week as Fed Seen Tapering

Malaysia’s five-year government bonds posted the worst week in a month and the ringgit was 0.7 off a three-year low on speculation fund outflows will accelerate as the Federal Reserve prepares to cut stimulus.

The yield on the 3.26 percent notes due March 2018 climbed 13 basis points, the biggest increase since July 19, to 3.66 percent as of 4:33 p.m. in Kuala Lumpur, data compiled by Bloomberg show. The ringgit dropped 0.7 percent to 3.2987 per dollar and touched 3.3228 yesterday, the lowest since June 2010.

Stocks declined across Asia this week after minutes of the Federal Reserve’s July meeting showed policy makers were “broadly comfortable” with reducing bond purchases this year should the economy improve. Malaysia’s current-account surplus shrank 70 percent in the second quarter, prompting Deutsche Asset & Wealth Management to warn the nation could find itself in a similar predicament to Indonesia, whose currency slumped 3.7 percent this week amid a record current-account deficit.

“The emerging-markets selloff is the main reason” for the rise in Malaysian bond yields, said Choong Yin Pheng, senior manager for fixed income and economic research at Hong Leong Bank Bhd. in Kuala Lumpur. “There is still some concern about the current account. I don’t think we will be the next Indonesia, although the risk is there.”

Foreign Outflows

Foreign holdings of Malaysian government and corporate securities dropped 4.6 percent in June to 229 billion ringgit ($69.4 billion), the first decline since February, central bank data show. The current-account surplus fell to 2.6 billion ringgit in the second quarter, the closest the country’s come to a deficit in data compiled by Bloomberg going back to 1999.

Southeast Asia’s third-largest economy may expand 4.5 percent to 5 percent in 2013, compared with a previous prediction of as much as 6 percent, the central bank said Aug. 21. Bank of America Merrill Lynch cut its growth forecast to 4.3 percent from 4.7 percent for 2013, according to an Aug. 21 research note.

The ringgit gained 0.3 percent today, paring the month’s losses to 1.7 percent. The FTSE Bursa Malaysia KLCI Index of shares dropped 3.7 percent this week, its worst performance since September 2011.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, rose 168 basis points during the five days to 10.03 percent. It fell 39 basis points today.

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