Malaysian Bonds Cap Worst Week Since February as 1MDB Defaults

Updated on
  • Investors trim holdings ahead of supply of new 10-year notes
  • Five-year credit default swaps climb for a second week

Malaysia’s 10-year government bonds completed the biggest weekly drop in almost three months as a debt default by a state investment company damped demand for the nation’s assets.

The country’s currency also weakened as 1Malaysia Development Bhd. missed an interest payment on a $1.75 billion bond, triggering cross-defaults on 7.4 billion ringgit ($1.9 billion) of the company’s debt, including borrowings that are guaranteed by the sovereign. Investors are selling the 10-year notes ahead of the issuance of a new similar-maturity bond in May, according to Maybank Investment Bank Bhd.

“The headline news around 1MDB remains one of the concerns for both onshore and foreign investors,” said Lawrence Lai, an interest-rate strategist at Standard Chartered Plc in Singapore. “In addition, the coming supply of long end also put upward pressure on the yield.”

The yield on the government’s securities due September 2025 rose eight basis points this week to 3.91 percent in Kuala Lumpur, the highest since March 16, according to prices from Bursa Malaysia. The weekly advance in the yield was the biggest since the period ended Feb. 5.

Ringgit Weakens

The ringgit weakened 0.2 percent from April 22 and on Friday to 3.9045 a dollar, according to prices from local banks compiled by Bloomberg. That pared its gain this year to 9.9 percent.

Malaysia warned investors during a dollar bond sale this month that it faces as much as $4.5 billion in potential liabilities should 1MDB default. Moody’s Investors Service estimates Malaysia’s contingent liabilities under the default could amount to about $7.5 billion, or 2.5 percent of gross domestic product in 2015.

Five-year credit default swaps climbed eight basis points this week to 164, according to prices from CMA. They rose three basis points last week.