Malaysian Bonds Complete Weekly Gain as Budget Deficit Narrows

Malaysia’s five-year bonds climbed for a third straight week, the longest winning streak since September, after the nation’s fiscal deficit narrowed.

Fourth-quarter gross domestic product rose at the fastest pace in a year and the budget shortfall shrank to 3.9 percent of GDP in 2013 from 4.5 percent in 2012, data showed this month. Inflation accelerated to a two-year high of 3.4 percent in January, more than the median estimate of economists for a reading of 3.3 percent, according to a Feb. 19 report.

“The fiscal deficit numbers for 2013 helped sentiment,” said Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at CIMB Investment Bank Bhd. “People are not fully pricing in expectations that Bank Negara will tighten monetary policy anytime soon. We have domestic demand boosting growth, but on the exports side it’s not a given that it’s going to be strong this year.”

The yield on the 3.26 percent government notes due March 2018 fell six basis points, or 0.06 percentage point, from Feb. 14 and four basis points today to 3.64 percent in Kuala Lumpur, according to data compiled by Bloomberg. That’s the lowest level since Jan. 20.

Cut Duration

The central bank has kept the overnight policy rate at 3 percent since May 2011. Citigroup Inc. recommends investors reduce duration in Malaysian debt relative to their benchmark as it expects price pressures to remain elevated, strategists including Singapore-based Siddharth Mathur wrote in a Feb. 20 research note.

Malaysia’s gross domestic product rose 5.1 percent in the three months through Dec. 31 from a year earlier, the quickest pace since a 6.5 percent expansion in the same period in 2012, the central bank said Feb. 12. Full-year growth slowed to 4.7 percent from 5.6 percent in 2012.

The ringgit strengthened 0.3 percent this week to 3.2954 per dollar in Kuala Lumpur, its third straight weekly gain, according to data compiled by Bloomberg. It climbed 0.4 percent today, trimming its three-month loss to 2.7 percent.

Malaysia’s foreign-exchange reserves fell to $132.3 billion as of Feb. 14, the lowest level since October 2011, according to central bank data released today.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell one basis point since Feb. 14 and 16 basis points today to 6.63 percent.

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