KUALA LUMPUR, June 20 — Malaysia’s three-year government bonds fell this week by the most since early May on speculation the central bank will raise its benchmark interest rate.

The yield on the 3.394 per cent notes due March 2017 climbed eight basis points from June 13 and one basis point today to 3.54 per cent in Kuala Lumpur, according to data compiled by Bloomberg. One-year rate swaps rose one basis point to 3.67 per cent, above Bank Negara Malaysia’s 3 per cent policy rate.

Consumer prices rose 3.2 per cent in May from a year earlier, below the 3.3 per cent forecast in a Bloomberg survey and a 3.4 per cent increase in April, a government report showed today. They climbed 3.5 per cent in March and February, the fastest pace in almost three years. A sale of 2017 bonds yesterday drew the fewest bids in more than a year.

“The three-year part of the curve is impacted most by the monetary-policy expectations,” said Vivek Rajpal, a Singapore-based strategist at Nomura Holdings Inc. “We believe we are heading into a rate hike.”

The ringgit retreated 0.2 per cent for the week and 0.3 per cent today to 3.2235 per dollar, according to data compiled by Bloomberg. The currency rallied 0.7 per cent yesterday, the biggest gain in a month, after Federal Reserve Chair Janet Yellen said interest would stay low for a “considerable time” following the end of bond purchases.

“There’s been some consolidation after the strong gains yesterday,” said Trang Thuy Le, Singapore-based currency strategist at Credit Suisse Group AG, who forecast the ringgit would advance to 3.22 within three months.

One-month implied volatility, a measure of expected swings in the exchange rate used to price options, fell 14 basis points, or 0.14 percentage point, during the five days to 5.04 per cent. It dropped for an eighth straight week.

Bond sale

Bank Negara said in a statement last month that “the degree of monetary accommodation may need to be adjusted” to address financial and economic imbalances.

The central bank has kept its key rate unchanged since May 2011 and next meets on July 10. Thirteen of 14 economists surveyed by Bloomberg predict policy will be tightened by at least 25 basis points by year-end.

The government’s RM3 billion (US$931 million) sale of three-year notes yesterday attracted bids for 1.39 times the amount on offer, the fewest since at least January 2013, data compiled by Bloomberg show.

Inflation in Malaysia has accelerated after the government started to lower subsidies on fuel and electricity last year to trim its fiscal deficit. An increase in natural-gas tariffs, which took effect in May, could add to those price pressures, said Nomura’s Rajpal. — Bloomberg