Thai bonds, Asia’s worst-performing debt, will probably extend losses as the government increases sales to a record to fund rebuilding after the floods disrupted production last year, according to Aberdeen Asset Management Co.
Thailand’s local-currency notes dropped 0.7 percent in 2012, the only market to have registered a decline among 10 nations tracked by HSBC Holdings Plc. Indonesia, which was awarded an investment-grade rating this year by Moody’s Investors Service, is posting 3.8 percent returns, the best in the region.
Bond offerings will climb 16 percent to about 520 billion baht ($16.8 billion) in the year that ends Sept. 30 to fund flood-prevention projects, the budget deficit and an increase in public servants’ salaries, according to the Finance Ministry. Prospects that inflation will accelerate as the economy recovers are also deterring Aberdeen Asset and ING Investment Management from buying Thai debt. The central bank forecasts 5.7 percent growth this year, faster than the 0.1 percent expansion in 2011.
“Increasing supply has been the main factor driving up yields,” Pongtharin Sapayanon, the head of fixed income in Bangkok at Aberdeen, which manages $295 billion of assets globally, said in an April 20 interview. “The pace of recovery is faster than expected and inflationary pressure will definitely rise as domestic demand will continue to be strong throughout the year.”
Revised Debt Plan
Yields on benchmark 10-year debt advanced 46 basis points, or 0.46 percentage point, this year to 3.75 percent yesterday and reached a six-month high of 3.85 percent on April 2, according to data compiled by Bloomberg. Yields on similar-maturity notes in Indonesia dropped 12 basis points to 5.91 percent. The rate on 3.65 percent baht-denominated securities due December 2021 added two basis points to 3.78 percent as of 11:07 a.m. in Bangkok, according to data compiled by Bloomberg.
The floods forced thousands of factories to suspend operations, causing asset losses amounting to 630 billion baht and economic damages of 795 billion baht, according to a Finance Ministry estimate in January. The Cabinet approved a revised debt-management plan for this fiscal year on March 13, which allows the government to borrow 800 billion baht from the local market, up from 350 billion baht announced in November.
About 400 billion baht will go toward financing the budget deficit, 350 billion baht for loans for flood-prevention projects and 50 billion baht for a flood-insurance fund, Harn Himathongkam, a deputy government spokesman, said on March 13.
“We are cautious on Thailand on the back of more supply to support spending on rebuilding,” Patrick Chia, the Singapore-based head of Asian fixed income at ING Investment Management, which oversaw $416 billion on Dec. 31, said in an April 13 interview.
Nomura Asset Management Co. bought Thai bonds maturing in 30 years or longer in the first quarter because insurance payouts and corporate tax receipts will boost the government’s ability to repay debt, according to Thomas Kemmsies, the Frankfurt-based head of fixed-income securities at the company, which managed $288 billion as of October.
Barclays Capital estimates total inflows to pay insurance claims will amount to $10 billion to $15 billion. The yield on 5 percent government bonds maturing in June 2040 rose 30 basis points this year to 4.43 percent, according to data compiled by Bloomberg.
“What this catastrophe did was allow a lot of Thai producers and companies to forcefully reinvest in hopefully state-of-the-art technology,” Kemmsies said in an April 19 interview. “They have to start their investment upswing again with insurance money.”
Thai bonds are also attractive because policy makers will probably allow the baht to appreciate to keep inflation at bay, Kemmsies said. Consumer-price gains accelerated in March for the first time since October, increasing 3.45 percent from a year earlier, official data show. The Bank of Thailand raised its 2012 inflation forecast in March to 3.4 percent from 3.2 percent.
The baht has strengthened 1.2 percent in the past three months, the second-best performance among Asia’s 11 most-traded currencies after Taiwan’s dollar, according to data compiled by Bloomberg.
“We think any inflation threat will be countered through slightly increased toleration for currency appreciation than raising interest rates, at least until reconstruction is as much as completed,” Kemmsies said.
East Asian local-currency bonds will probably extend gains this year as near-zero interest rates in developed nations prompt investors to seek higher yields, the Asian Development Bank said in its Asia Bond Monitor report today. It classifies emerging-market East Asia as China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
Change in Policy
Aberdeen’s Pongtharin and Kokusai Asset Management Co. in Tokyo say odds that interest rates will rise are deterring Thai bond investors. Pongtharin said he expects the policy rate to increase by at least 25 basis points in the second half and the 10-year yield to climb to 4 percent in six months.
The Bank of Thailand held its one-day bond repurchase rate at 3 percent on March 21 after cutting it by a total of 50 basis points at the previous two meetings. The Finance Ministry said on March 26 it expects the central bank to boost borrowing costs later this year.
“Yields, especially medium to long-term yields, have climbed this year not only due to rising supplies, but also a change in market views that the next policy move by the central bank would be a rate hike toward the end of this year,” Takahide Irimura, the head of emerging-market research at Kokusai Asset, which manages $45 billion, said in an April 18 interview. “The pace of gains in yields will probably be slower from here as they have risen so much already.”