1Malaysia Development Bhd Default Heightens Risks

Malaysian government bond recorded its biggest weekly drop in over two months following a debt default by state owned fund, 1Malaysia Development Bhd.

The sovereign fund reportedly missed an interest payment on a $1.75 billion bond on the 25th of April, triggering cross defaults on about $1.9 billion of the company’s debt, including two other borrowings that are guaranteed by the fund.

Since the news of the default broke-out, the demand for Malaysia’s 10-year bond has dropped. Although, Maybank Investment Bank Bhd said “investors are selling Malaysian 10-year notes ahead of the issuance of another similar maturity bond in May,” analysts believed there might be a connection between current situation and the drop in demand.

“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 FTSE Bursa Malaysia dropped 0.12 percent to 1,672.72 points, its lowest since March. The local currency fell 0.33 percent to 3.903 against the dollar on Friday to end the week with a 0.18 percent marginal decline.

The default overshadowed a positive rally in crude oil prices that has helped strengthen the Ringgit by 10 percent in 2016.

“The ringgit has been helped by rebounding oil prices and the recent installation of the new BNM governor, who is widely considered to be a safe pair of hands,” says Gareth Leather, Senior Asia Economist at Capital Economics. “There had been some concerns that Malaysia’s embattled Prime Minister, Najib Razak, would try and give the position to a political crony.”

On Monday, Malaysian markets will remain closed for Labor Day.