Malaysian Bonds Post Worst Week Since July on Fed Taper Risk

Malaysia’s three-year government bonds posted the worst week since July as increasing signs of a recovery in the U.S. economy added to speculation the Federal Reserve will pare its stimulus as soon as this month.

American manufacturing and payrolls data beat economists’ estimates in November, while jobless claims fell last week to the lowest in more than two months. A Malaysian plan to raise electricity prices may prompt the central bank to increase its policy rate by 50 basis points in the second half of 2014 as inflationary pressures build, according to a Nomura Holdings Inc. Dec. 2 report. The ringgit fell for a seventh week, the longest stretch of losses since 2005.

“With the strong U.S. data, taper expectations are hardening,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “While one could argue that the pickup in inflation could ease after a year, the power inflation pass-through could be a tad sticky.”

The yield on the 3.172 percent notes due July 2016 climbed 10 basis points from Nov. 29 and one basis point today to an eight-week high of 3.27 percent in Kuala Lumpur, according to data compiled by Bloomberg. The rate on 10-year debt, the most sensitive to the outlook for consumer price increases, rose five basis points this week to 4.14 percent, the highest since July.

State-owned power distributor Tenaga Nasional Bhd. will raise electricity prices by an average 15 percent in Peninsular Malaysia from Jan. 1, Maximus Johnity Ongkili, minister of energy, green technology and water, said Dec. 2. The plan comes on top of an increase in fuel costs in September.

Higher electricity rates may cause a temporary advance in inflation, central bank Governor Zeti Akhtar Aziz said Dec. 3, citing a preliminary assessment by the monetary authority.

Subsidy Cuts

“While the electricity price changes add to supply-side pressures that the central bank need not necessarily respond to, we see a risk that second-round effects are larger than expected, given other pressures from earlier subsidy cuts,” Euben Paracuelles, Singapore-based economist at Nomura, wrote in the Dec. 2 report.

The ringgit fell 0.3 percent this week and 0.2 percent today to 3.2337 per dollar in Kuala Lumpur. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped 20 basis points, or 0.20 percentage point, from Nov. 29 and five basis points today to 8.10 percent.

The government reported today that the nation’s trade surplus narrowed to 8.2 billion ringgit ($2.5 billion) in October from 8.7 billion ringgit in the previous month. The median forecast of economists in a Bloomberg survey was for a surplus of 9.2 billion ringgit.

A U.S. Labor Department report today may show the unemployment rate dropped to 7.2 percent last month, another Bloomberg survey shows. Companies added 185,000 workers to payrolls, less than the 204,000 in October, according to a separate survey. The U.S. Federal Open Market Committee, which will next meet Dec. 17-18, may reduce its debt purchases should the economy improve as anticipated, according to minutes of their October meeting.

Before it's here, it's on the Bloomberg Terminal.