Thailand’s bond market is showing growing pessimism over the economy’s recovery from the first recession since 2009, as signs the US will maintain stimulus bolsters global demand for the nation’s sovereign debt.
The 10-year yield declined four times as fast as that of two-year notes since the end of August, narrowing the relative yield gap by 30 basis points to 103, according to data compiled by Bloomberg. The difference reached 97 on Oct 4, the least since July 23. The spread shrank nine basis points to 71 in Malaysia, while it widened in Indonesia and the Philippines.
Finance Minister Kittiratt Na-Ranong said in an interview this month that borrowing costs of 2.5 per cent are too high, as a government stimulus plan awaits approval in parliament. The central bank lowered interest rates in May for the third time since January last year, amid the lowest inflation among Southeast Asia’s biggest economies.
“With low inflation and sluggish economic growth, we can’t rule out one more interest-rate cut by the Bank of Thailand this year,” Shigehisa Shiroki, chief trader on the Asian and emerging-markets team at Mizuho Bank Ltd. in Tokyo, said in an Oct 9 interview. “That means short-end yields have some room to decline.”
The yield on Thailand’s 10-year local-currency bonds, which are more sensitive to inflation expectations, dropped 40 basis points to 3.87 per cent since the end of August, while the rate on two-year notes fell nine basis points to 2.84 per cent, data compiled by Bloomberg show. Consumer-price gains slowed to 1.4 per cent in September from a year earlier, the least since October 2009.
‘Quite Calm’
Global funds purchased $2.3 billion more Thai debt than they sold since the Federal Reserve unexpectedly maintained its stimulus on Sept 18, after net sales of $1.4 billion in August, Thai Bond Market Association data show. Thailand may attract 50 billion baht ($1.6 billion) to 100 billion baht of bond inflows this quarter after the delay, Niwat Kanjanaphoomin, president of the institution, told a press conference in Bangkok on Oct 7.
The Bank of Thailand plans to reduce its 2013 growth estimate from 4.2 per cent on Oct 25 after cutting it from 5.1 per cent in July, Senior Director Mathee Supapongse said at a Sept 30 media briefing. The Finance Ministry trimmed its prediction to 3.7 per cent on Sept 27 from an earlier projection of 4.5 per cent.
Schroder Investment Management Ltd. is “modestly overweight” on Thai government debt, meaning the fund holds more than the benchmark it uses to track performance.
“We like Thailand,” Rajeev De Mello, who manages $10 billion as Singapore-based head of Asian fixed income at Schroder Investment, said in an Oct 9 interview. “Inflation is extremely low; it keeps Bank of Thailand quite calm.”
External Factors
While curves flattened in Thailand and Malaysia they steepened in Indonesia and the Philippines. Malaysia kept its benchmark interest rate at 3 per cent since May 2011 and the Philippines at 3.5 per cent since October last year, when policy makers cut by 25 basis points to 3.5 per cent. Indonesia raised borrowing costs four times in 2013 to 7.25 per cent in an effort to rein in the highest inflation in Southeast Asia.
The difference in yields between Indonesia’s two- and 10- year notes increased 39 basis points since Aug 31 to 101, while the equivalent in the Philippines widened 15 to 106.
Pipat Luengnaruemitchai, vice president at Phatra Securities Pcl in Bangkok, said Thai yields could rise in the longer term given the Fed will still pare bond purchases that spurred demand for emerging-market assets.
‘Bit Cautious’
Thailand’s bond yields are more correlated with external factors including the Fed’s reduction in quantitative easing, Pipat said in an Oct 8 interview.
"To have long investment money in the bond market, I would be a bit cautious because of the long-term trend of interest rates,” Pipat said. “In the very short term, we could see some downside to bond yields, but not much. Bond yields have come down quite a bit due to the postponement of the QE reduction.”
Interest-rate swaps show some investors are starting to predict another rate cut. The one-year onshore contract, the fixed cost needed to receive a floating payment, was 2.46 per cent as of 10:54 a.m. in Bangkok, below the central bank’s benchmark rate, according to data compiled by Bloomberg. All 11 economists surveyed by Bloomberg predict policy will stay on hold at the next meeting on Oct. 16.
‘Weak Growth’
“Government bond yields could go lower partly in reflection of the possibility that the BOT could cut rates and in general due to the weak growth outlook and inflation still falling,” Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore, said in an Oct 9 interview. “There’s a 30 per cent chance of another 25 basis point cut.”
Thailand’s exports rebounded in August after contracting for three straight months, while factory output is still muted following five consecutive months of declines.
The baht depreciated 7.2 per cent in the past six months, which may have helped boost export growth. That compares with losses of 15.3 per cent in the Indonesian rupiah, 5 per cent in the Philippine peso, 4.6 per cent in Malaysia’s ringgit and 0.9 per cent in Singapore’s dollar.
The cost to protect Thai bonds from non-payment for five years using credit-default swaps fell 10 basis points this month to 126 basis points, up from an eight-week low of 106 on Sept 19, according to data provider CMA. The similar rate in the Philippines was 106, 225 in Indonesia and 121 for Malaysia.
“The growth outlook continues to be quite sluggish,” Kevin Lai, an economist at Daiwa Capital Markets Hong Kong Ltd., said in an Oct 8 interview from the city. “There may be an increase in bond inflows in a month or so, but the trend is certainly on the way down.”