Malaysian Bonds Extend Gains on Rate Cut Bets; Ringgit Weakens

By David Yong

Nov. 14 (Bloomberg) -- Malaysian government bonds rose for a second week on speculation the central bank will cut borrowing costs to spur economic growth. The ringgit declined.

Three-year yields fell to the lowest since June after a government report this week showed factory production contracted in September, the first cutback since March 2007. Governor Zeti Akhtar Aziz said this week Bank Negara Malaysia would be prepared to lower interest rates if needed to support growth as inflation eases.

``The market is bullish on the rate cut front,'' said Tan Chee Wee, head of fixed-income research at Aseambankers Bhd., a unit of Malaysia's biggest lender. ``The odds have increased with the weak economic data this week.''

The yield on the 3.833 percent note due September 2011 fell 8 basis points to 3.61 percent from a week ago, according to Bursa Malaysia Bhd. The price rose 0.21, or 2.1 ringgit per 1,000 ringgit face amount, to 100.6. A basis point is 0.01 percentage point.

The government yesterday auctioned an additional 3 billion ringgit ($834 million) of five-year bonds at 3.751 percent yield, versus 4.273 percent at the previous sale in August. The yield on the April 2014 notes declined 16 basis points this week as the notes became a new five-year benchmark.

Bank Negara on Oct. 24 kept its overnight policy rate at 3.5 percent for a 20th straight meeting since May 2006. Policy makers gather for the final time this year on Nov. 24.

Ringgit Weakens

The ringgit pared its losses this week to 1.2 percent on speculation the central bank is buying its own currency to stem its slide to near a two-year low. The Kuala Lumpur Composite Index halted a three-day slump after U.S. equities surged yesterday.

The ringgit traded at 3.5960 per dollar as of 4:35 p.m. in Kuala Lumpur, versus 3.5985 yesterday and 3.5520 a week ago, according to data compiled by Bloomberg. The currency reached 3.6163 yesterday, the lowest since December 2006.

``A rate cut sooner than later would be a boost to the stock market and ringgit positive,'' said Enrico Tanuwidjaja, an economist at Oversea-Chinese Banking Corp. in Singapore. ``The market has seen some intervention at the topside, so we would watch 3.60 as a key psychological level.''

Malaysia's benchmark stock index has declined 15 percent since Lehman Brothers Holdings Inc.'s bankruptcy filing on Sept. 15, erasing $38 billion of wealth from the market.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.