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Malaysian Bonds Retreat This Week as 1MDB Probe Hurts Sentiment

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Malaysia’s government bonds fell this week, with the three-year yield rising the most in two months, after the ringgit dropped to pre-peg levels amid a probe into a state investment company.

The currency tumbled past 3.8 per dollar on July 6, the level at which it was fixed for seven years until 2005, and weakened to its lowest since 1998 on Tuesday. An investigation into accounts linked to 1Malaysia Development Bhd. has exacerbated the ringgit’s oil-led decline, while concern that Greece will exit the euro and a rout in Chinese stocks added to the risk-adverse sentiment.

“As Malaysia continues to be under the negative headlines, there could be a certain level of outflows,” said Fakrizzaki Ghazali, a credit strategist at RHB Research Institute Sdn. in Kuala Lumpur. “Besides that, there was also the Greece debt issue and slowdown in China.”

The three-year yield climbed seven basis points in the past five days to 3.27 percent in Kuala Lumpur, prices from Bursa Malaysia show. It declined four basis points Friday. The 10-year yield rose six basis points from July 3 to 4.03 percent.

The ringgit fell 0.4 percent this week to 3.7938 a dollar and reached a 16-year low of 3.8130 on July 7, according to prices from local banks compiled by Bloomberg. The currency gained 0.1 percent Friday on optimism Greece will secure a deal with creditors this weekend after offering to take more reform measures in return for aid, according to Malayan Banking Bhd.

“We continue to caution that domestic concerns could remain for a while and this is expected to weigh on the ringgit,” said Christopher Wong, a Singapore-based senior currency analyst at Malayan Banking.

Policy Rate

Bank Negara Malaysia held its benchmark interest rate at 3.25 percent for a sixth meeting on Thursday as a task force that includes the police and the central bank investigates allegations that funds linked to 1MDB may have ended up in Prime Minister Najib Razak’s bank accounts, a claim he is disputing.

The central bank may keep borrowing costs on hold rather than ease policy as political developments weigh on the ringgit and portfolio flows, Morgan Stanley analysts including Singapore-based Deyi Tan wrote in a research note Thursday.

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