Thai Three-Year Yield Drops Most Since October as Rate Cut Seen

Thailand’s government bonds rose, with the benchmark three-year yield dropping the most since October, on speculation the central bank will cut borrowing costs. The baht fell for a sixth day.

Finance Minister Kittiratt Na-Ranong said April 26 that a reduction in the nation’s policy rate will stem capital inflows that helped push the baht to a 16-year high this month, and the Bank of Thailand has agreed to take that into account. The U.S. reported April 26 that economic growth in the first quarter rose at a 2.5 percent annualized rate, less than the 3 percent economists had forecast.

“Some investors are betting on a rate cut from the BOT as one of the options still available” to reduce capital inflows, said Nalin Chutchotitham, a Bangkok-based analyst at Kasikornbank Pcl. “Bonds also got some support because of the weak data from the U.S.”

The yield on the 3.125 percent notes due December 2015 dropped five basis points, or 0.05 percentage point, to 2.8 percent as of 3:12 p.m. in Bangkok, according to data compiled by Bloomberg. That was the biggest decline since Oct. 18, and the rate was at the lowest level since November 2010.

The central bank has kept the benchmark interest rate at 2.75 percent for the past four meetings, drawing criticism from Finance Minister Kittiratt, who said the higher rate attracts inflows, putting appreciation pressure on the baht. The monetary authority next reviews policy on May 29.

Inflows, Baht

Foreign funds bought $1.99 billion more sovereign debt than they sold this month, adding to net purchases of $9.62 billion in the first quarter, Thai Bond Market Association data show.

The baht dropped 0.2 percent to 29.29 per dollar, data compiled by Bloomberg show. The currency slumped 2 percent last week, the biggest five-day decline since January 2007 amid concern the monetary authorities will impose measures to stem inflows. That pared its advance this year to 4.4 percent, still the best performance among the 11 most-traded Asian currencies. The baht touched 28.56 on April 22 and April 19, the strongest level since July 1997.

Kittiratt ruled out a suggestion that the government will collect tax on interest income earned by foreign investors, and said he sees no need for the central bank to impose new measures on the baht.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed 34 basis points to 5.41 percent.

Before it's here, it's on the Bloomberg Terminal.