Thai Bonds Rise as Central Bank Seen Lowering Borrowing Costs

Thailand’s sovereign bonds advanced on speculation the central bank will bow to government pressure and cut interest rates in an attempt to curb inflows that pushed the baht to a 16-year high last month.

Finance Minister Kittiratt Na-Ranong reiterated on April 26 that lower borrowing costs would reduce the attractiveness of local assets. The Bank of Thailand has kept its benchmark interest rate at 2.75 percent since October and next meets to review policy on May 29. A private gauge of Chinese manufacturing fell last month, adding to signs growth in the world’s second-biggest economy will cool for a second quarter.

“Some investors are pricing in a potential rate cut in Thailand as the government pressure intensifies,” said Tsutomu Soma, manager of Rakuten Securities Inc.’s fixed-income business unit department in Tokyo. “Some weak economic data, including China’s, also encourages investors to choose safer assets, supporting bonds in general.”

The yield on the 3.625 percent notes due June 2023 dropped three basis points, or 0.03 percentage point, from April 30 to 3.38 percent as of 3:03 p.m. in Bangkok, according to data compiled by Bloomberg. Onshore financial markets were closed yesterday for a public holiday. The one-year onshore swap rate, the fixed cost needed to receive a floating payment, fell three basis point to 2.39 percent, the lowest since February 2011.

The final April reading of 50.4 for a Purchasing Managers’ Index in China released today by HSBC Holdings Plc and Markit Economics compares with 51.6 for March and the preliminary reading of 50.5. China is Thailand’s biggest overseas market, taking 12 percent of the country’s exports in the first quarter, official data show.

Falling Baht

The baht fell 0.2 percent to 29.38 per dollar from April 30, data compiled by Bloomberg show. It has risen 4.1 percent against the dollar this year, the best performance among Asia’s 11 most-traded currencies. The baht touched 28.56 on April 22 and April 19, the strongest level since July 1997.

The currency’s recent volatility is not justified by economic fundamentals and the monetary-policy committee agreed to use an appropriate policy mix to restrain the baht if needed, the central bank said in a April 30 statement.

Finance Minister Kittiratt said today that he was “disappointed” that the central bank did not cut the key rate on April 30. “We don’t have any clear solutions after many discussions” on measures to curb the baht’s appreciation, he said.

The Bank of Thailand will probably liberalize foreign-exchange rules for resident outflows that will put downward pressure on the currency, according to a Morgan Stanley research note yesterday.

“In the long term, however, we think that such liberalization measures are not necessarily negative for the currency, as they encourage market-defined foreign-exchange rates and lower the need for active foreign-exchange intervention,” Morgan Stanley said in the note.

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