Thai government debt offers the best yield adjusted for inflation among Southeast Asia’s five-biggest economies after consumer prices fell 0.52% in February.

Bloomberg/Bangkok

Investors are loading up on Thai bonds on renewed bets the central bank will cut borrowing costs to counter the first bout of deflation in five years.
Thai government debt offers the best yield adjusted for inflation among Southeast Asia’s five-biggest economies after consumer prices fell 0.52% in February. The last time Thailand experienced deflation in 2009, the central bank’s benchmark rate was at 1.25%.
Schroder Investment Management Ltd, Kokusai Asset Management Co and ING Groep NV see room for Thailand to ease, supporting demand after the biggest inflow to the nation’s bonds since July. A rate cut, the first by Governor Prasarn Trairatvorakul since March 2014, would help spur investment in an economy that has struggled to recover from months of political upheaval that climaxed in a coup last May.
“This is an attractive environment for Thai bond holders,” Manu George, Asian fixed-income investment director at Schroder Investment Management (Singapore) Ltd, whose bond team oversees $10bn, said by e-mail on March 4. “The weak inflation numbers and the anticipation that the Bank of Thailand may want to follow other Asian countries in cutting rates” are spurring interest in Thai securities, he said.
One-year interest-rate swaps have fallen eight basis points below the central bank’s 2% benchmark rate before next week’s meeting, on speculation policy makers will follow Indonesia, India and China in seeking to stimulate economic growth. Ten-year notes yield 2.67%, giving a real return of 3.19% after accounting for consumer prices, more than 2.92% in Malaysia and Singapore’s 2.75%, according to data compiled by Bloomberg. Global funds pumped a net $297mn into the nation’s debt this month, adding to February’s $430mn that was the highest since July, Thai Bond Market Association figures show.
While the one-year swap rose to a seven-month high of 2.04% on February 16, it has since retreated to 1.92%. Six of 19 analysts surveyed by Bloomberg see a year-end rate of at least 1.75%. Eleven forecast no change, while the rest are plugging for tightening. The next meeting is March 11.
Investors are returning to bets for a rate cut to spur consumer-price gains as Brent crude dropped 2.5% this month, after February’s 18% rally, the first since the slump began in June. The commerce ministry lowered its 2015 inflation forecast this week to 0.6% to 1.3% from 1.8% to 2.5%.
The bond market is also flagging increasing odds for monetary easing as the two-year yield fell seven basis points in the past fortnight to a six-week low of 2.04%.
The government tried to play down market expectations when Finance Minister Sommai Phasee told reporters in Bangkok on February 18 that state spending would be a better way to stimulate growth than lower interest rates. Borrowing costs are sufficiently supportive, according to the central bank’s minutes of its Jan 28 review, when six of the 22 economists surveyed forecast a cut to 1.75% and the rest no change.
Slowing growth and the faster-than-anticipated drop in price pressures will provide room for the central bank to deliver a 25 basis-point cut by June, according to Kokusai Asset Management in Tokyo. The $387bn economy expanded 0.7% last year, the slowest since 2011.
“While the Bank of Thailand seems reluctant to cut rates at this point, there is a possibility of a further reduction,” Takahide Irimura, Tokyo-based head of emerging-market research at Kokusai, which oversees about $33bn, said in a March 4 phone interview. “This will continue to put downward pressure on local rates.”
Thailand’s baht has turned into Asia’s best-performing currency in the past three months, boosting fixed-income returns for overseas investors. It gained 1.9% and reached a four-month high against the dollar this week.
While that may be good for bond funds, it’s making exports more expensive and pushing down the price of imports. Lower debt yields from monetary easing would help slow the currency’s gain. Overseas shipments dropped 2.6% in January from a year earlier, the third decline in six months.