Ringgit's Slide Spurs Worst Quarterly Bond Losses in Six Years

  • Ringgit completes biggest quarterly drop since Asian crisis
  • Rabobank sees no recovery until commodity prices improve

A slide in Malaysia’s ringgit spurred the biggest quarterly loss in the nation’s bonds since 2009 and drove up the cost to insure the debt by the most in four years.

The ringgit’s weakness, slowing Chinese growth, slumping commodity prices and a looming U.S. interest-rate increase prompted global investors to pull funds from Malaysian stocks and bonds. Reports this month from the Wall Street Journal and New York Times over money laundering and overseas property purchases relating to 1Malaysia Development Bhd. and Prime Minister Najib Razak also weighed on sentiment.

Malaysia’s local-currency bonds dropped 1 percent this quarter, the biggest decline since June 2009, according to a JPMorgan Chase & Co. index. Five-year credit-default swaps insuring the debt rose more than 1 percentage point to 238 in the three months and climbed to 247 earlier on Wednesday, the highest since 2009, according to CMA prices.

“I can’t really see where the floor is until we actually have a really clear view on what’s going on with China and the U.S.,” said Michael Every, Hong Kong-based head of financial markets research at Rabobank Group.  “The political situation means people don’t feel so confident putting money in.”

No Re-Peg

The currency declined 14 percent from June 30, the steepest drop since 1997 and trailing only the Brazilian real, Colombian peso and Russian ruble among 24 emerging markets tracked by Bloomberg. The ringgit fell to a new 17-year low of 4.48 per dollar this quarter and a measure of exchange-rate volatility used in pricing options rose by the most since at least 2006. Brent crude continued its slide, hurting government revenue in Malaysia, Asia’s only major oil exporter.

“I really can see no real support for the ringgit at the moment,” Every said.

Central bank Governor Zeti Akhtar Aziz reiterated on Wednesday that there’s no plan to re-peg the ringgit. It was fixed at 3.8 to the dollar in 1998 during the Asian financial crisis, a measure that stood until 2005. It rallied 1.4 percent to 4.3955 on Wednesday as Asian stocks rebounded.

“If you peg the currency, something else will adjust,” Zeti told reporters in Kuala Lumpur. “That means it’s either prices or demand conditions, and those might have greater costs on our economy.”

The 10-year government bond yield climbed 14 basis points to 4.15 percent this quarter, pushing up borrowing costs for Najib’s $444 billion development program. The nation’s stocks were the relative bright spot as the benchmark FTSE Bursa Malaysia KLCI Index fell 5 percent from June 30, the least among Southeast Asia’s major bourses.

Overseas investors sold a net 17.7 billion ringgit ($4 billion) of shares this year, surpassing 2014’s 6.9 billion ringgit of outflows, according to a report Monday from MIDF Amanah Investment Bank Bhd. in Kuala Lumpur. Global funds reduced government bond holdings in August to the lowest since March.

“The additional risks of political uncertainty are largely priced in and I don’t think much will change on that anytime soon,” said Mixo Das, a Singapore-based strategist at Nomura Holdings Inc., which is underweight on the country’s equities. “As for the fund outflow risks, I also think that the worst on that is past us.”

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