KUALA LUMPUR, Feb 21 — Malaysia’s five-year bonds headed for a third weekly gain, 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 per cent of GDP in 2013 from 4.5 per cent in 2012, data showed this month. Inflation accelerated to a two-year high of 3.4 per cent in January, more than the median estimate of economists for a reading of 3.3 per cent, according to a February 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 per cent government notes due March 2018 fell five basis points, or 0.05 percentage point, from February 14 and three basis points today to 3.65 per cent as of 11:28 a.m. in Kuala Lumpur, according to data compiled by Bloomberg.

Cut duration

The central bank has kept the policy rate at 3 per cent 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 February 20 research note.

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

The ringgit strengthened 0.3 per cent this week to 3.2983 per dollar in Kuala Lumpur, heading for its third straight weekly gain, according to data compiled by Bloomberg. It has lost 2.8 per cent in the last three months, the worst performance among Asia’s 11 most-traded currencies.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose six basis points since February 14 to 6.70 per cent. The rate fell nine basis points today.— Bloomberg