A 7% gain in Thai bonds has turned them into one of emerging Asia’s best performers in the final quarter of 2023, but there are signs to suggest the rally may be about to end.
Baht-denominated notes may struggle to extend their winning run as the Bank of Thailand has signalled an extended interest-rate pause and bond supply looks set to increase. These headwinds are likely to erode the gains that followed the recent rate policy pivot by the US Federal Reserve.
Typically among the lowest yielders in Asia, baht securities tend to display a higher sensitivity to movements in US Treasuries — a phenomenon that has worked in their favour as US debt rallied in recent weeks.
But the odds are fast stacking up against Thai bonds, with inflation expected to quicken next year if the government goes ahead with its 500-billion-baht cash handout to stimulate consumption and the broader economy.
“For the front-end to belly part of the sovereign curve, the yields are too low based on my forecast for a rate hold from the Bank of Thailand in 2024,” said Poon Panichpibool, a strategist at Krungthai Bank. Yields are expected to rise given the rate-pause outlook, he said.
The yield on five-year Thai bonds has fallen 41 basis points in the current quarter, heading for the biggest three-month drop since the end of 2022.
The two- and five-year yields now stand at 2.35% and 2.49%, respectively, below the Bank of Thailand’s benchmark rate of 2.50%. Yields on mid-dated bonds have not remained below the policy rate for more than four months at any one time over the past decade, according to data compiled by Bloomberg.
Bonds may come under pressure as Krungthai Bank and Goldman Sachs caution that the Bank of Thailand is likely to keep interest rates on hold in 2024 amid upside risks to inflation.
Price pressures are expected to quicken once the digital wallet programme, which will give 10,000 baht each to some 50 million people, starts in May.
To make matters worse, investors may have to contend with a heavier supply pipeline as the government proceeds with plans to tap the debt market to fund the cash handouts.
The government should be able to finalise the measure by the second quarter, and this will also weigh on bonds, said Mr Poon.