Big stimulus borrowing could spur yield-curve control

Big stimulus borrowing could spur yield-curve control

Don Nakornthab, senior director for the economic and policy department of the Bank of Thailand. (Bank of Thailand photo)
Don Nakornthab, senior director for the economic and policy department of the Bank of Thailand. (Bank of Thailand photo)

Thailand’s 1 trillion baht borrowing programme for economic stimulus could spur central bank steps to keep a lid on bond yields.

The government is set to start raising money as early as May, stoking questions about the outlook for bonds. A plausible scenario is that the Bank of Thailand deploys unconventional policies to temper borrowing costs if necessary, according to DBS Group Holdings.

“The borrowing is quite sizable and will put upward pressure on longer-term government yields, all else equal,” said Eugene Leow, a fixed-income strategist at DBS in Singapore. “The Bank of Thailand could embark on quantitative easing or yield-curve control. At this point, yields still seem low.”

Don Nakornthab, senior director for the economic and policy department, said earlier this week it’s studied unconventional options such as a large-scale asset purchase programme and some form of yield-curve control, should they be needed. The government is looking at a mix of instruments, not just sovereign bonds, for the fund raising program that could run up to September 2021.

‘Huge’ borrowing

At 1 trillion baht, the additional borrowing is more than double the average annual budget deficit of recent years, according to Australia & New Zealand Banking Group.

“How this huge borrowing plan will affect liquidity is the big question in the market now,” said Nunmanus Piamthipmanus, chief investment officer at SCB Asset Management. “The hope is that it’s done in steps, using a variety funding sources.”

The BoT has stepped in with a liquidity backstop for the fixed-income mutual fund and corporate bond sectors after the coronavirus pandemic stoked investor panic.

Thailand has the biggest Southeast Asian local-currency bond market, worth $446 billion at the end of 2019, according to the Asian Development Bank. Foreign ownership is low, at about 6% of outstanding debt, Thai Bond Market Association figures show.

A Bloomberg Barclays index of Thai bonds has climbed almost 1% in dollar terms so far in April, after plunging more than 7% in March. The yield on the 10-year sovereign bond has declined to 1.35% from a recent peak of 1.79% on March 19.

Thailand relies on tourism and exports, but both are slumping amid the coronavirus outbreak, adding pressure for government stimulus.

The nation is on course for a 6.7% contraction in gross domestic product this year, the worst outlook among leading Southeast Asian economies, the International Monetary Fund estimates.

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