Malaysia Default Swaps Climb to Four-Month High on Fed Outlook

The cost of insuring Malaysia’s sovereign bonds rose to a four-month high on speculation overseas investors will trim holdings of the nation’s debt should the Federal Reserve reduce stimulus. The ringgit fell.

The yield on Malaysia’s benchmark five-year notes dropped eight basis points this week after climbing 25 basis points in the five days through May 31. U.S. data are giving mixed signals on whether the Fed will pare back its bond-buying program that’s driven demand for emerging-market assets. A report this week showed manufacturing contracted in May for the first time since November, while durable goods orders released May 24 for April beat economists’ forecasts.

“Concerns about the Fed tapering would lead to a risk of further outflows from emerging markets,” said Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore.

Five-year credit-default swaps rose seven basis points, or 0.07 percentage point, to 94 in New York yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That was the highest level since Feb. 5.

The yield on the 3.48 percent notes due March 2023 increased one basis point to 3.43 percent as of 10:14 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. Default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Ringgit Drops

Overseas holdings of Malaysian sovereign debt rose 5 percent to $46.9 billion in April, according to the latest central bank data issued on May 31.

Dallas Fed President Richard Fisher said he would have preferred U.S. policy makers to have started scaling back their bond-buying program, speaking in a BNN Television interview. He added that mortgage debt purchases should be pared back, rather than stopped.

Labor Department data tomorrow may show U.S. companies added 165,000 jobs in May, the same as a month earlier, according to the median forecast of economists in a Bloomberg survey. The ADP Research Institute reported yesterday that 135,000 positions were created last month, fewer than predicted.

The ringgit declined 0.2 percent to 3.0900 per dollar, according to data compiled by Bloomberg. It has lost 3.6 percent over the past month, the second-worst performance among Asia’s 11 most-active currencies.

One-month implied volatility, a measure of expected moves in exchange rates used to price options, rose 12 basis points to 7.59 percent.

To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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