KUALA LUMPUR, Jan 24 — Malaysia’s five-year government bonds posted their biggest weekly drop since November and the ringgit fell after inflation accelerated to a two-year high.

The currency touched a five-month low yesterday after data released January 22 showed consumer prices climbed 3.2 per cent last month from a year earlier, exceeding the 3.1 per cent median estimate in a Bloomberg survey. The increase may prompt Bank Negara Malaysia to raise its policy rate by 50 basis points this year, Rahul Bajoria, a Singapore-based economist at Barclays Plc, wrote in a January 22 research note.

The yield on Malaysia’s 3.26 per cent sovereign bonds due March 2018 advanced nine basis points this week, the most since the period ended November 1, to 3.71 per cent in Kuala Lumpur, according to data compiled by Bloomberg. It rose two basis points, or 0.02 percentage point, today. The rate on the 4.181 per cent securities maturing in July 2024 increased eight basis points since January 17 to 4.25 per cent.

“The currency weakness is resulting in soft demand from foreign investors,” said Rohit Arora, a Singapore-based interest-rates strategist at Barclays. “Rising inflation and monetary-policy tightening expectations are resulting in a softening of onshore demand.”

Global funds held 29 per cent of Malaysian government bonds at the end of November, official data show, making them relatively vulnerable to foreign outflows. That compares with 32 per cent in Indonesia and 18 per cent in Thailand.

Sukuk auction

The ringgit declined 1.1 per cent this week, the biggest loss in a month, to 3.3334 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. It touched 3.3363 yesterday, the weakest level since August 28, and retreated 0.1 per cent today. The currency has weakened 1.7 per cent this year, as the Federal Reserve began paring its bond-buying programme that has driven demand for emerging-market assets.

Borrowing costs rose at the government’s first auction of Islamic debt for 2014 held this week. The treasury sold RM3.5 billion of notes due April 2019 on January 21 at 3.953 per cent, compared with 3.91 per cent in the secondary market.

Market speculation that Malaysia will raise interest rates may be “premature” as the pickup in inflation is mainly due to administrative adjustments after the government increased fuel and electricity tariffs, DBS Group Holdings Ltd. analysts including Singapore-based Irvin Seah wrote in a January 21 report.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, rose 58 basis points this week and nine basis points today to 7.49 per cent. The gauge had its first five-day advance since the period ended November 29. — Bloomberg