Thai Junta Bond Yields Lower Than U.S. Debt Deter Global Funds

  • Nikko Asset is underweight and will cut if inflation edges up
  • Thai 30-year yield dropped more than 100 basis points in 2016

Foreign investors are shying away from Thai government bonds after their extra yield over U.S. Treasuries evaporated, bringing an end to a record nine-month rally.

An index of baht notes fell in April after surging 12 percent from July through March. The yield premium on Thailand’s 10-year securities is near zero, compared with more than two percentage points four years ago, and the gap with U.S. bonds maturing in 2046 has turned negative. The currency’s gains are slowing too following the best quarterly advance since early 2013.

The appeal of the Southeast Asian nation’s debt is likely to fade further as the central bank seems to now favor spurring growth via stimulus spending rather than cutting borrowing costs, while the U.S. is poised to raise interest rates. A 15-month bout of deflation also ceased in April, removing support for bonds in a country that remains under military rule two years after a coup -- with no set date for elections.

“As the Federal Reserve embarks on further rate hikes this year, we expect U.S. Treasury yields to slowly creep up,” said Edward Ng, a Singapore-based fixed-income portfolio manager at Nikko Asset Management Co. which oversaw 18.5 trillion yen ($171 billion) globally at the end of 2015. “We are maintaining our underweight in Thai bonds and will look to further reduce our holdings when inflation shows stronger signs of picking up in the next few months.”

Bank of Thailand Governor Veerathai Santiprabhob said in March that fiscal policies will do more to improve the economy than lowering borrowing costs, and the government’s stimulus spending should show results in the second half. The central bank has kept the repurchase rate at 1.5 percent since cutting it in April last year. It next meets on May 11.

Curve Flattens

The finance ministry cut the 2016 gross domestic product growth forecast to 3.3 percent from 3.7 percent last month. The Washington-based International Monetary Fund projects a lower 3 percent.

Thailand’s yield curve flattened after the 30-year yield dropped more than a 100 basis points in 2016 to 2.46 percent, while that for 10-year paper declined 75 points to 1.77 percent.

Plentiful money supply is supporting demand with the three-month money-market rate near the lowest in more than five years. Overseas investors turned net buyers of Thai debt this month after offloading $2.9 billion in April.

“The rally in the first three months of this year was more based on liquidity than anything else,” said Pongtharin Sapayanon, a Bangkok-based fixed-income manager at Aberdeen Asset Management Plc overseeing $421 billion worldwide. “If yields go up, we will see buying back in from locals because there are more positives than negatives to be invested in Thai bonds.”

He’s considering adding to his holdings from the current “almost neutral” position against the benchmark used to measure performance should yields rise “significantly.” It’s unlikely there will be any big selloff in long-term bonds because there’s still large demand from insurers, he said.

Bonds Expensive

The rally in sovereign debt has petered out on speculation it was overdone as 10-year yields dropped below Treasuries, said Porntipa Nungnamjai, a Bangkok-based fund manager at Krungsri Asset Management Co. which oversees about $9 billion.

Thai growth has been lagging expectations and there was hope that the military government could get investment off the ground and spur the private sector, “but that hasn’t really translated,” said Wilfred Wee, a Singapore-based fund manager at Investec Asset Management Ltd. If there’s a more “empowered” government then that will create positive sentiment, which will be negative for bonds, he said.

“From a foreign perspective, we see very low bond yields,” Wee said. “We appreciate that the onshore bids are significant, but it is also quite expensive, say relative to the 10-year U.S.”

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