Thai Bonds Gain, Swaps Drop to Two-Year Low on Rate-Cut Outlook

Thailand’s bonds rose and onshore interest-rate swaps dropped to a two-year low on speculation the central bank will cut borrowing costs amid pressure from the government to curb inflows.

The yield on notes due in 2015 declined to its lowest level since November 2010 and the one-year swap fell for a third day after Finance Minister Kittiratt Na-Ranong said April 26 a reduction in the policy rate will stem the influx of capital that helped drive the baht to a 16-year high this month. The ministry predicts economic growth will slow to 5.3 percent in 2013, compared with 6.4 percent last year.

“Some investors are pricing in the possibility of a rate cut on concern the central bank will give in to increasing pressure to do so from the government,” said Tohru Nishihama, an economist covering emerging markets at Dai-ichi Life Research Institute Inc. in Tokyo. “Personally, I don’t think they will cut as current economic conditions in Thailand don’t really require a rate reduction.”

The yield on the 3.625 percent debt maturing May 2015 fell one basis point, or 0.01 percentage point, to 2.77 percent as of 3:29 p.m. in Bangkok, according to data compiled by Bloomberg. That was the lowest level since November 2010. It dropped seven basis points in April, a third monthly decline.

The one-year swap contract, the fixed cost needed to receive a floating rate, slipped six basis points to 2.41 percent today and fell 24 basis points in April. That was the biggest monthly decrease since October, when the central bank last lowered borrowing costs by a quarter of a percentage point to 2.75 percent.

Exporter Demand

The Bank of Thailand has left its benchmark interest rate unchanged for the past four meetings, drawing criticism from Finance Minister Kittiratt who said the higher rate attracts inflows and puts pressure on the baht to appreciate. The monetary authority next reviews policy on May 29.

Overseas funds bought $2.4 billion more sovereign debt than they sold this month, adding to net purchases of $9.6 billion in the first quarter, Thai Bond Market Association data show.

Thailand attracted $1.1 billion of foreign direct investment and $1.96 billion of foreign portfolio investment in March, Bank of Thailand Senior Director Mathee Supapongse said today. The Southeast Asian nation posted a current-account surplus of $1.9 billion last month, after an excess of $1.6 billion the previous month, a central bank report shows today.

The baht fell for a seventh day today as speculation of increasing demand from local exporters was countered by concern the monetary authority will impose capital controls.

The currency declined 0.1 percent today and 0.2 percent this month to 29.33 per dollar, data compiled by Bloomberg show. It climbed 4.3 percent this year, the best performance in Asia, and reached 28.56 on April 22 and April 19, the strongest level since July 1997.

“We can expect some baht demand from exporters as it’s quite a good level,” Dai-ichi Life Research’s Nishihama said. “Corporate demand usually increases toward month-end. But concern about capital controls remains, keeping downward pressure on the baht in the short term.”

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