Malaysian Bonds Decline This Week on Faster Inflation Outlook

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

Consumer-price 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 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 0.2 percent from March 28 to 3.2802 per dollar, data compiled by Bloomberg show. It advanced 0.1 percent today.

Swaps Rise

One-year interest-rate swaps reached 3.51 percent, the highest level 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.

Malaysia’s exports increased 12.3 percent in February from a year earlier, exceeding the median forecast of economists for a 10.6 percent rise, a government report showed today. The trade surplus widened to 10.4 billion ringgit, the biggest gap since March 2012.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, rose eight basis points this week to 6.65 percent, according to data compiled by Bloomberg. The rate fell one basis point today.

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