Thai bonds post longest rally

Thai bonds post longest rally

Thailand's slowest inflation in five years and prospects of a protracted slump in oil prices are a boon for bond investors enjoying the longest rally since 2010.

Baht securities returned 1.9% in November, the biggest advance in more than two years, taking gains to 6% since June, according to a Bloomberg index. Overseas funds bought a net US$6.1 billion of Thai sovereign debt in the past six months, compared with $6.6 billion of Indonesian bonds, official data show.

Barclays Plc may lower its annual inflation forecast of 2% for this year and next as Brent crude extended a drop to 41% from 2014’s high. Consumer prices in Thailand rose 1.26% in November, giving the central bank leeway to cut interest rates and spur the slowest growth in three years.

"Slumping oil prices will certainly slow inflation further," Win Phromphaet, the head of investment at the Social Security Office, Thailand's biggest money manager with about $37 billion of assets, said by phone on Nov 25. "This reinforces some speculation about easing monetary policies as the domestic economy is so weak and stagnant.”

The economy will expand 1% this year, the slowest pace since 2011 when the country was hit by the worst floods in 70 years, according to the median estimate of 27 economists in a Bloomberg survey. That would match the forecast by the National Economic and Social Development Board on Nov 17.

Appetite for Thai debt has recovered since a May coup that toppled Prime Minister Yingluck Shinawatra. The yield on 10-year government notes has dropped 83 basis points from June 30 to 3.12 %. Based on the current inflation rate, that provides a real yield of 1.86%, compared with 1.6% at the end of the second quarter when crude prices began to plunge.

The nation's benchmark equities gauge has also rallied. The Stock Exchange of Thailand Index has climbed more than 7% since the end of the second quarter. Singapore has the region's lowest inflation rate of 0.1%, while Indonesia has the highest at 6.2%.

Thailand stands to be among the biggest winners in Asia from the drop in energy prices, according to Bank of America Merrill Lynch. A 10% decline in crude would add 45 basis points to gross domestic product growth in Thailand, while net oil exporter Malaysia would be the sole loser among the region's emerging markets, economists including Singapore-based Chua Hak Bin wrote in a report on Sunday.

Malaysia's ringgit dropped 1.5 % on Sunday as Brent crude started the week 2% lower, adding to the 13 percent slide in the five-days through Nov 28, data compiled by Bloomberg show. In contrast, the baht fell 0.07% versus respective declines of 0.6% and 0.11% for the Indonesian rupiah and Singapore dollar.

Annual consumer-price increases in Thailand will ease to a five-year low of 2% in 2014, according to the median estimate of 23 economists in a Bloomberg survey. The central bank will keep its benchmark interest rate at 2% at a Dec 17 review, the lowest level since 2010, a separate survey shows. Policy makers last cut the rate by 25 basis points in March and November 2013.

The drop in energy costs "will help slow inflation further,"  Adithep Vanabriksha, chief investment officer at Aberdeen Asset Management Plc, which oversees about $549 billion, said in a Nov 27 interview. "That would help keep the interest rate at this low level for some time.”

Thai GDP increased 0.6% in the third quarter from a year earlier, after advancing 0.4% in the previous three months, according to a Nov 17 government report. The $387 billion economy contracted 0.5% in the first quarter.

While Thailand's benchmark rate is accommodative, monetary policy can be eased if the economy fails to recover as expected, Bank of Thailand Governor Prasarn Trairatvorakul said in a Nov 11 speech in Ayutthaya province.

Barclays sees a chance that the central bank will loosen policy further because underlying inflation remains low and price expectations have started declining again, according to a report on Sunday written by economist Rahul Bajoria.

While the yield on Thailand's five-year sovereign notes fell 57 basis points, or 0.57 percentage point, in the past two months to a five-year low of 2.32%, Malaysia's similar yield rose 13 basis points to 3.81%, according to data compiled by Bloomberg. The Indonesian yield dropped 65 basis points to 7.63%.

"We expect Thailand bonds to continue to do well in this environment," Rohit Arora, an interest-rate strategist at Barclays in Singapore, said in a Nov 26 e-mail. “Thai government bonds have been one of our preferred duration spots in emerging Asian markets."

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