Malaysian Default Risk at Four-Month High on China, U.S. Data

The cost of insuring Malaysian sovereign debt rose to a four-month high as indicators signaled slowing growth in China and the U.S., two of the nation’s biggest overseas markets.

The U.S.’s Institute for Supply Management said yesterday its factory index declined to 51.3 in January, the lowest since May, contributing to the sharpest drop in the S&P 500 (SPX) stocks gauge in seven months. A Chinese manufacturing index fell to a six-month low in January, a Feb. 1 report showed.

Five-year credit-default swaps on Malaysian debt rose four basis points to 132 in New York yesterday, according to data provider CMA. That’s the highest since Oct 3. In the Philippines, the contracts reached a level not seen since September. Credit-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.

“We’ve been having this risk-off sentiment particularly hurting emerging markets,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “That risk was further compounded by a bad ISM manufacturing read from the U.S. It doesn’t bode well for Malaysia’s overall economic growth.”

Risk-Off

Investors should “gear up” for a risk-off day in emerging markets including equities, currencies and rates given the magnitude of the S&P 500 stock index’s drop yesterday, Credit Agricole CIB strategists including Hong Kong-based Dariusz Kowalczyk wrote in a research note today.

The ringgit was little changed at 3.3457 per dollar from Jan. 30 as of 9:49 a.m. in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. Malaysian financial markets were shut on Jan. 31 and Feb. 3 for public holidays. The currency has lost 2.1 percent this year.

The yield on Malaysia’s five-year government notes fell two basis points, or 0.02 percentage point, from Jan. 30 to 3.76 percent, according to data compiled by Bloomberg. One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, declined four basis points to 7.82 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: Amit Prakash at aprakash1@bloomberg.net

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