As Rate Verdict Nears, Shorter-Maturity Thai Bonds Are in Demand

Haven flows and prospects for rate easing are boosting demand for shorter-maturity Thai bonds ahead of next week’s first monetary policy meeting for the year. Yields are unlikely to rebound until there’s a successful containment of the pandemic.

Two-year sovereign yields fell to a record 0.34% in early January following a resurgence in virus cases in the Southeast Asian country. They have edged back up thanks to improved efforts to contain the virus, especially in Bangkok, but they remain below the policy rate of 0.5%. The Jan. 20 auction of2024 bonds garnered robust demand, with a bid-to-cover of 3.4 times — the highest in three months — underscoring the strength of investor’s appetite for havens.

Thailand reported a record number of new virus cases on Tuesday as the country ramped uptesting among migrant laborers in Samut Sakhon, a seafood hub near Bangkok. In the capital, the authorities have eased restrictions since last Friday by allowing some businessesto reopen, and they furtherrelaxed curbs again on Wednesday.

While some economists and traders are divided over whether the Bank of Thailand will cut its key rate on Feb. 3, economists surveyed by Bloomberg as of Thursday were projecting that policy makers will stand pat.

“We expect a no change decision at the February policy meeting as the central bank appears geared toward targeted easing measures such as the lowering of interest rate ceilings for credit cards, personal loans and debt restructuring,” said Kobsidthi Silpachai, head of capital market research at Kasikornbank Pcl in Bangkok. Still, the one-month Thai Treasury bill is currently pricing an 80% probability of a 25 basis point cut in the next month or so, he added.

Thailand isn’t alone in Southeast Asia in facing a resurgence in virus cases. Malaysia’s strict lockdown measures are currently expected to last for three weeks until early February. Indonesia similarly extended restrictions in Java and Bali by two weeks to Feb. 8, with record fatalities reported earlier this week. While lockdowns have been eased in most parts of the Philippines, restrictions remain in the capital region as the nation battles the region’s worst outbreak after Indonesia.

Containment efforts in Thailand, as well as its plan to start a vaccination program in mid-February, could lead to an eventual recovery in demand for longer-maturity notes. The spread between 2- and 10-year bonds remain close to the widest in more than two years reached earlier this month at 96 basis points.

Thailand is ranked 14th globally, ahead of its three Southeast Asian neighbors, in Bloomberg’s “Covid resilience ranking,” which takes into account recent virus case loads and fatalities, as well as vaccine coverage for the population. Despite the recent tightening of restrictions, its lockdown score is still the lowest in the region, according to indexes compiled by Goldman Sachs Group Inc., which measure the severity of the restrictions and their impact on mobility.

Still, the recent virus resurgence in January has seen the central bank caution about the possibility it wouldrevise down its forecast for gross domestic product this year. To mitigate the impact of the tightened restrictions, the government passed a $7 billioncash handout program last week to assist low-income workers.

Read More: Thai Finance Ministry Cuts 2021 GDP Forecast on New Outbreak (1)

That suggests the safety of shorter-maturity bonds will remain in vogue for now, especially with the potential for a surprise central bank easing next week.

What to Watch

• All four Southeast Asian nations come out with PMI figures on Monday
• Bank of Thailand will be announcing its rate decision on Wednesday, while the latest inflation figures are due Friday
• Indonesia will be publishing inflation data on Monday, and will report fourth-quarter gross domestic product data on Friday
• The Philippines will be releasing inflation data on Friday

Note: Marcus Wong is an EM macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.

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