Pioneer Joins Mirae Favoring Baht to Peso on Yield
Philippine bonds are losing favor among investors who are turning to Thailand, after 10-year peso yields tumbled below 3 percent to a record in this year’s best rally in Asia.
Pioneer Investments in London said it added to Thai holdings as scope for monetary easing gives the nation stronger growth potential than its Southeast Asian neighbor. Mirae Asset Global Investment Co. and Neuberger Berman Group LLC also prefer Thai debt. Thailand’s 10-year yield is 92 basis points higher than inflation, compared with 18 points in the Philippines.
Philippine local-currency notes handed investors more than six times the gain in Thailand this year after the central bank reduced interest rates on its special-deposit accounts to deter peso purchases by foreign funds. The Bank of Thailand will eventually bow to government pressure to lower borrowing costs in 2013 to stem inflows that drove the baht to a 16-year high in April, according to Mirae.
“We are in the camp of investors who believe opportunity lies with Thai bonds vis-a-vis the Philippines,” Yerlan Syzdykov, a London-based portfolio manager at Pioneer, which oversees the equivalent of $212 billion globally, said in a May 3 interview. “Our choice stems from a stronger growth trajectory in Thailand and a stronger currency,” he said, adding that easing in Thailand won’t alter the attraction.
Peso-denominated debt returned 14 percent in 2013, the most among 10 Asia indexes compiled by HSBC Holdings Plc ahead of India’s 6.4 percent, after the Philippines won investment-grade status of BBB- from Standard & Poor’s and Fitch Ratings Ltd. Thai bonds, rated two levels higher, climbed 2.3 percent.
Ten-year yields in the Philippines reached a record low of 2.78 percent yesterday, according to data compiled by Bloomberg. The similar rate in Thailand fell to 3.34 percent today, the lowest level since February 2012.
The cost to insure Thai sovereign debt from non-payment for five years dropped 13 basis points this year to 82 and was below the three-year average of 126, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That compares with a 23 basis-point drop in the Philippines to 83.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Thailand’s Finance Minister Kittiratt Na-Ranong has repeatedly pressed the central bank to lower interest rates as monetary easing in developed countries boosts the allure of Asia’s higher yields. The baht is the region’s best-performing currency this year after rallying 3.2 percent, which threatens to hurt manufacturers in the export-dependent economy. The peso declined 0.2 percent.
Easing by central banks this month in South Korea, Australia, India and the euro area may encourage Thailand to follow suit. The Bank of Korea lowered its seven-day repurchase rate yesterday to 2.5 percent from 2.75 percent.
Bank of Thailand has kept its benchmark rate at 2.75 percent in the last four meetings, most recently on April 3. While the Philippines has left its equivalent at 3.5 percent since October, policy makers instead opted to cut rates on the central bank’s special-deposit accounts three times this year and ban foreigners from parking money in them.
Kim Jin Ha, the Seoul-based head of global fixed-income at Mirae, said Thai bond yields are attractive, while levels in the Philippines don’t “merit any buying at the moment.”
Thailand’s 10-year borrowing costs declined 20 basis points, or 0.2 percentage point, this year, compared with a 1.4 percentage-point drop in the Philippines.
“There’s a possibility that Thailand will deliver one or two interest-rate cuts this year as the government pressures the central bank to act and slow the currency’s appreciation,” Kim, whose company oversees about $55 billion globally, said in a May 7 interview. “The prospect of the rate policy is positive on Thai bonds.”
Dollar-based investors will reap a 4.4 percent return for holding baht-denominated bonds through the end of this year, including interest income, compared with 2.5 percent for peso debt, according to Bloomberg surveys.
Sacha Tihanyi, a Hong Kong-based senior foreign-exchange strategist at Bank of Nova Scotia, said he prefers the Philippine peso over the Thai baht because of the risk the Bank of Thailand will impose capital controls.
Finance Minister Kittiratt said May 7 that the central bank has prepared measures to curb inflows if needed. The government should limit foreigners’ investment in domestic bonds with maturities of less than six months, Paiboon Nalinthrangkurn, chairman of the Federation of Thai Capital Organizations, a trade group whose seven members include the stock exchange and securities commission, said in a May 3 interview from Bangkok.
“There is greater uncertainty in Thailand with regard to potential Bank of Thailand measures to curb foreign inflows,” Tihanyi, whose company was the second most-accurate forecaster for Asian currencies over the past year, said in a May 8 interview. “I still believe that there is higher risk that the baht suffers from additional underperformance.”
Tihanyi predicts the Thai currency may weaken 2.1 percent to 30.3 per dollar by year-end from 29.65 as of 10:57 a.m. in Bangkok. The baht last traded around that level in January, data compiled by Bloomberg show. He forecasts the peso will rise 0.8 percent to 40.8.
Overseas investors purchased about $12 billion more Thai sovereign debt than they sold this year, compared with $31 billion for 2012 as a whole, according to the Thai Bond Market Association. The Philippines doesn’t provide such figures.
The baht touched 28.56 per dollar on April 19 and April 22, the strongest level since a 1997 devaluation sparked the Asian financial crisis. The peso reached 40.55 on March 13, and in the previous two months, the highest since 2008.
Thailand plans to sell a record 525 billion baht ($17.8 billion) of bonds in the fiscal year that ends Sept. 30, a 52 percent increase from the previous year, according to the website of the Ministry of Finance’s Public Debt Management Office. The Cabinet approved a 2 trillion baht infrastructure spending plan in February that will include projects such as building 10 railway lines in Bangkok.
Yields on Thailand’s two-year government securities have dropped 14 basis points this quarter, more than twice as fast as a six basis-point decline on five-year bonds. Shorter-term notes are more sensitive to the outlook for interest rates, signaling investors may be pricing in a cut in borrowing costs.
“Supply issues will be the foremost concern for investors in Thailand, but if you look at the curve, it looks more attractive,” Prashant Singh, managing director of local-currency, emerging-market debt at Neuberger Berman Singapore Pte Ltd., a subsidiary of the U.S. hedge fund, said in a May 7 interview. “Philippine bonds have moved quite a bit, so it’s going to be a tactical play to switch into Thailand.”
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