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Thai Bonds Turn Around With Demand at Both Ends of Curve

Marcus Wong
·3 min read

(Bloomberg) -- There’s a slice of the Thai yield curve for everyone.

Local investors are bidding up shorter-dated bonds as the spread of Covid-19 in the country convinces them to seek out the safest assets. Global funds are buying longer maturities after the yield premium over Treasuries improved and on the prospect of baht gains.

Demand for both ends of the curve -- along with stabilizing U.S. Treasuries -- has helped Thailand’s debt begin to turn around after a poor start to the year. Benchmark 10-year yields have dropped more than 20 basis points to 1.90% from their peak in March, while five-year yields have declined about the same amount to 1%.

“Local investors have been shortening duration due to abundant onshore liquidity and to avoid the risk of mark-to-market losses in the event of rebounding yields,” said Poon Panichpibool, a strategist at Krung Thai Bank Pcl in Bangkok.

“Foreigners have been extending duration in April due to attractive Thai spreads over Treasuries, and expectations for baht appreciation as is seen from increasing short dollar calls from research houses,” he said.

Thailand reported a record one-day virus tally on Friday, spurring the government to impose additional curbs including bans on some alcohol sales and the closure of schools. The rising case count looks set to delay plans to further reopen the borders to much-needed tourism.

Local investors have reacted to climbing cases by shifting funds to shorter-dated government debt and away from company bonds. The spread between an index of corporate bonds over sovereign securities widened to 436 basis points this week, the highest in least 10 years, from around 300 basis points before the pandemic.

Longer End

Foreigners are more interested in the other end of the curve.

The decline in Thai bonds earlier this year saw the extra yield offered by 10-year debt over similar-maturity Treasuries climb to more than 30 basis points, after being almost 40 basis points below them early last year. In contrast, the premium on Indonesian bonds over Treasuries has narrowed in the same period.

Two more positive factors are are encouraging both local and foreign investors: the central bank’s management of bond supply and the outlook for inflation. Bank of Thailand has greatly reduced issuance of central bank debt since November to accommodate the government’s larger-than-usual financing needs, DBS Bank Ltd. said in a note.

The emergence of the third virus wave is likely to damp inflationary pressures due to declining consumer and business confidence, limits on economic activity and lower labor productivity, said Kobsidthi Silpachai, head of capital market research at Kasikornbank Pcl in Bangkok.

Picking the next direction for global markets looks to be getting harder than ever amid uncertainties over the pandemic. Nevertheless, the outlook for Thai bonds has been getting brighter - irrespective of which end of the curve you look at.

(Updates with central bank’s debt management strategy in 10th paragraph)

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