KUALA LUMPUR, April 4 — Malaysia’s 10-year government bonds headed for 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 per cent and 4 per cent in 2014, compared with 2.1 per cent 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 per cent notes due July 2024 climbed two basis points, or 0.02 percentage point, this week to 4.14 per cent as of 12:13 pm in Kuala Lumpur, according to data compiled by Bloomberg. It reached 4.15 per cent yesterday, the highest level since February 13, and was little changed today.

The ringgit declined 0.3 per cent from March 28 to 3.2835 per dollar and was steady today, data compiled by Bloomberg show.

Swaps rise

One-year interest-rate swaps reached 3.51 per cent, the highest level since July 2011, signalling investors anticipate the central bank will raise borrowing costs from 3 per cent. The benchmark has remained at that level since May 2011 even as inflation quickened to 3.5 per cent in February.

Consumer prices advanced after the government trimmed fuel and power subsidies to lower the budget shortfall. Prime Minister Datuk Seri Najib Razak will introduce a consumption tax in 2015 and targets a 15.6 per cent reduction in subsidies to RM39.4 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 per cent in February from a year earlier, exceeding the median forecast of economists for a 10.6 per cent rise, a government report showed today. The trade surplus widened to RM10.4 billion, 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 10 basis points this week to 6.67 per cent, according to data compiled by Bloomberg. The rate was little changed today. — Bloomberg