Aberdeen Sees Thai Bonds Weathering Fed Storm With Best Returns

  • Currency reserves, low foreign-debt holdings to act as buffer
  • Thai stimulus seen boosting economy in fourth quarter

Thai bonds are giving the best returns among Southeast Asia’s five-biggest economies as investors judge the nation to be best-placed to weather a U.S. interest-rate increase.

Baht government debt gained 3 percent in local-currency terms in the past six months, more than five times the 0.5 percent for ringgit notes, according to Bloomberg indexes. Indonesia eked out a 0.2 percent return, while securities in the Philippines and Singapore delivered losses. Funds don’t seem put off by the weakness in regional currencies, all of which have depreciated since May.

Aberdeen Asset Management Plc and Krungsri Asset Management Co. say Thailand’s $157 billion in foreign-exchange reserves and low foreign-debt ownership will serve as a buffer against outflows when the Federal Reserve acts. Prime Minister Prayuth Chan-Ocha’s $1.7 billion of stimulus packages have helped shore up the economy as the rejection of a new constitution in September pushed the military junta’s restoration of democracy down the tracks.

“The Thai market has huge demand from domestic mutual funds and insurers, and any selloff by foreign investors can be absorbed by those institutions,” said Porntipa Nungnamjai, a Bangkok-based fixed-income manager at Krungsri Asset, which oversees about $8 billion. “As a net oil importer, low prices have really benefited Thailand compared with Malaysia and Indonesia.”

Prime Minister Prayuth has announced three stimulus packages totaling 60 billion baht to aid local communities, farmers and small businesses, and to help bolster the property sector. The government also plans to raise about 100 billion baht ($2.8 billion) by selling stakes in the so-called Thailand Future Fund to finance infrastructure projects, including the expansion of road and rail networks. That’s all helped to revive consumer sentiment, which rose in October for the first time in 10 months, complemented by two interest-rate cuts this year.

Thailand’s 10-year government bond yield has declined 12 basis points to 2.72 percent in the past six months, two basis points below 2015’s average, according to data compiled by Bloomberg. Malaysia’s equivalent rose 46 basis points to 4.33 percent and Indonesia’s climbed 63 to 8.65 percent.

The positive sentiment is reflected in the credit-default swaps market, where investors are paying less to insure Thailand’s bonds than higher-rated Malaysia, with the latter under stress due to depressed Brent crude prices that are cutting government revenue for Asia’s only major net oil exporter. Thai five-year CDS contracts were at 125 basis points on Friday compared with 173 for its neighbor.

Yield Deterrent

Not everyone is convinced, as some investors will be searching for competitive yields once the U.S. starts raising interest rates, according to Barclays Plc in Singapore. Futures show those odds at 68 percent for a December move. Thai 10-year debt yields are the lowest among Southeast Asia’s five-biggest economies behind Singapore.

The baht has weakened 6 percent in the past six months. While that’s less than the 16 percent decline in Malaysia’s ringgit, it’s more than the 5.3 percent loss in both the Singapore dollar and Philippine peso. The rupiah has dropped 3.5 percent.

“Thai government bonds are now the lowest yielders in Asean, and remain vulnerable to a selloff as monetary policy diverges,” said Rohit Arora, an interest-rate strategist at Barclays. “We don’t think this outperformance is likely to continue in 2016, especially as we don’t expect further significant weakening of commodities from here on.”

Less Vulnerable

On the other hand, Thailand may be less vulnerable than some of its counterparts to capital outflows. Global funds owned 16 percent of the nation’s sovereign debt and 30 percent of Malaysia’s in October, central bank data show. In Indonesia, the proportion was 37 percent in November, according to government figures.

Thailand’s foreign-exchange reserves have also held up and are pretty much unchanged from December. Malaysia’s holdings have declined 19 percent to $94 billion and those in Indonesia dropped 10 percent to $100.7 billion.

Deputy Prime Minister Somkid Jatusripitak said on Wednesday that the economy may expand more than 3 percent in 2015 as growth accelerates in the fourth quarter due to the stimulus measures. Gross domestic product increased 2.9 percent in the three months ended September from a year earlier, faster than 2.8 percent in the previous period. Last year was the worst since 2011, with GDP rising 0.9 percent. 

“That bonds will still be the main safe-haven for domestic investors during this uncertain and volatile period,” said Pongtharin Sapayanon, a Bangkok-based fixed-income manager at Aberdeen Asset, which was overseeing $483 billion as of June. “With these factors, Thai bonds still have room to gain further.”

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