Following a surprise victory for Malaysia’s opposition Pakatan Harapan, which displaced a government that had held power for more than 60 years – since the country declared independence in 1957 – its U.S. dollar bonds tumbled shortly after the markets opened the next day.  The winning coalition was led by 92-year-old Dr. Mahathir Mohamad, who had previously served as Prime Minister from 1981-2003.

The sovereign bonds due 2026 widened more than 10 bps to a spread of 97 bps over Treasuries before easing to a spread of 92 bps, 7 bps wider than the last close of 85 bps.  Its five-year CDS widened by 7 bps to 93 bps in active trading, even as the Asia ex-Japan iTraxx investment-grade CDS index tightened by 0.25 bps.  State-owned oil company Petroliam Nasional’s bonds widened 9 bps in choppy trading before recovering slightly.  Petronas’ bonds due 2022 were seen at 102 bps over Treasuries before recovering to 95 bps, 2 bps wider than the last close.  CIMB’s bonds due 2022 widened 5 bps to 121 bps over Treasuries and RHB Bank’s bonds due 2021 widened 8 bps to 106 bps over Treasuries.  Traders expect more bloodshed when markets open again after the weekend.

Analysts warned that the change in government could be negative for the country’s finances.  Moody’s reported that “little is known about the opposition’s full range of economic policies, and its electoral pledges have lacked details that would allow for a full assessment of their budgetary and macroeconomic impact”.  Mahathir said during the election campaign that if elected he planned to abolish goods and service tax and reintroduce fuel subsidies, moves that Moody’s thinks will be credit negative, shrinking the government’s revenue base and impacting its fiscal position.

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