KUALA LUMPUR, Aug 23 — Malaysia’s five-year government bonds headed for their worst week in a month and the ringgit fell on speculation fund outflows will accelerate as the Federal Reserve prepares to cut stimulus.

The benchmark stock index was set for its biggest five-day drop since September 2011 after minutes of the Federal Reserve’s July meeting released this week showed policy makers were “broadly comfortable” with reducing bond-buying this year should the US economy improve. Malaysia’s current-account surplus shrank 70 per cent in the second quarter, prompting Deutsche Asset & Wealth Management to warn the nation could find itself in a similar predicament to Indonesia, whose currency plummeted 4.2 per cent this week.

“The emerging-markets selloff is the main reason” for the rise in Malaysian bond yields, said Choong Yin Pheng, senior manager for fixed income and economic research at Hong Leong Bank Bhd. in Kuala Lumpur. “There is still some concern about the current account. I don’t think we will be the next Indonesia, although the risk is there.”

The yield on the 3.26 per cent sovereign notes due March 2018 climbed 12 basis points this week, the most since July 19, to 3.64 per cent as of 9:54am in Kuala Lumpur, according to data compiled by Bloomberg. The yield rose two basis points, or 0.02 percentage point, today.

Foreign outflows

Foreign holdings of Malaysian government and corporate securities dropped 4.6 per cent in June to 229 billion ringgit ($69 billion), the first decline since February, central bank data show. The current-account surplus fell to RM2.6 billion in the second quarter, the closest the country’s come to a deficit in data compiled by Bloomberg going back to 1999.

Southeast Asia’s third-largest economy may expand 4.5 per cent to 5 per cent in 2013, compared with a previous prediction of as much as 6 per cent, the central bank said August 21. Bank of America Merrill Lynch cut its growth forecast to 4.3 per cent from 4.7 per cent for 2013, according to an August 21 research note.

The ringgit weakened 0.8 per cent since August 16 to 3.3047 per dollar, according to data compiled by Bloomberg. The currency rebounded 0.2 per cent today, paring its monthly drop to 1.8 per cent. One-month implied volatility, a measure of expected moves in exchange rates used to price options, rose 176 basis points this week to 10.12 per cent. It fell 30 basis points today. — Bloomberg