KUALA LUMPUR (April 29): Malaysia's 10-year government bonds headed for the biggest weekly drop this year as a debt default by a state investment company damped demand for the nation's assets.

The country's currency was poised for the steepest five-day loss in more than two months after 1Malaysia Development Bhd missed an interest payment on a US$1.75 billion ($2.4 billion) bond, triggering cross-defaults on 7.4 billion ringgit ($2.5 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 remain one of the concern 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 10 basis points this week to 3.93% as of 2:45 pm in Kuala Lumpur, the highest since March 16, according to prices from Bursa Malaysia. The weekly gain in the yield was the biggest since the period ended Dec. 11.

The ringgit has weakened 0.3% since April 22 to 3.9115 per dollar, according to prices from local banks compiled by Bloomberg. The weekly move was the most since the period ended Feb. 19.

Malaysia warned investors during a dollar bond sale this month that it faces as much as US$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 US$7.5 billion, or 2.5% of gross domestic product in 2015.

Five-year credit default swaps climbed 12 basis points this week to 168, the highest since March 8, according to prices from CMA.