Photographer: Dario Pignatelli/Bloomberg

Thailand Wins as Negative-Rate Refugees From Japan Hunt Yields

  • Japan search for higher yields will continue: SBI Securities
  • Social Security Office considers riskier assets like stocks

Japanese investors fleeing negative bond yields at home boosted Thai debt holdings to a 21-month high, supporting the market as the Southeast Asian nation’s biggest pension fund considers switching to riskier assets including stocks.

Japanese investment trusts held the most Thai debt since April 2014 last month and inflows into baht bonds by global funds are headed for the best quarter in 18 months. Thailand’s currency boasts the lowest volatility in the region versus the dollar, even as it trades at the weakest against the yen since 2014.

“The trend of searching for higher yields overseas from Japan is likely to continue this year," said Tsutomu Soma, general manager of the fixed-income department in Tokyo at SBI Securities Co. “The baht’s volatility is the lowest in Southeast Asia, and while investors suffer from volatile stock movements they probably like the relatively stable Thai assets." 

A record bout of deflation is boosting returns for baht debt investors ahead of elections promised by the military government in 2017, while lower living costs and a plunge in oil lifted consumer confidence from a 16-month low. The country’s current-account surplus and gains in bonds over the past three months are also larger than any of its neighbors.

Thai bonds are attracting the most overseas funds this quarter since September 2014.

Thailand’s Social Security Office, which invests 77 percent of its $39.2 billion assets in local government bonds and those of state enterprises and private companies, is planning to switch into more “risky” assets such as stocks once it gets approval from the board of directors, Chompoopen Sirithorn, the Bangkok-based head of investments at the pension company representing 14 million members, said in an interview on Tuesday.

The yield on the 2040 sovereign debt, among the longer-maturities favored by pension funds and insurers, has plunged to 3.16 percent in 2016 compared with a six-year average of 4.18 percent, according to data compiled by Bloomberg. The 10-year yield has fallen 50 basis points this year to 2.02 percent and dropped to 1.98 percent last week, the lowest level since at least 2000.

The 2025 notes offer a real yield of 2.55 percent after adjusting for the 0.5 percent decline in consumer prices in January. That compares with 3.90 percent in Indonesia, 2.54 percent in the Philippines and 1.24 percent in Malaysia, all of whom have inflation.

“We have to urgently revise our investment strategy otherwise the existing
returns will be insufficient for retirement payments of our members,” said Chompoopen. “Bond yields have fallen so fast and to a level that is much lower than we had imagined.”

Thai Long-Term Bond Yields Slide on Risk Aversion

Thai debt handed investors a 5.2 percent return in the past three months, according to a Bloomberg index. Indonesian securities gained 5 percent, while those from the Philippines advanced 3.6 percent and Malaysia’s 2.5 percent. Global investors have pulled a net $272 million from Thailand’s stocks this quarter and the SET Index of shares has climbed 0.9 percent.

Japanese investors’ holdings of the Southeast Asian nation’s bonds increased 3.2 percent in January to 14.4 billion yen ($128 million), data from the Investment Trusts Association of Japan show. Thai debt lured $2 billion of foreign cash this quarter, the highest since September 2014, according to Bloomberg-compiled data.

Overseas bond funds are finding comfort in the baht, Asia’s fourth-best performing currency this year with a 1 percent gain. The currency’s one-month implied volatility used to price options fell 30 basis points to 5.8 percent.

“Foreign inflows will likely continue as the high current account and trade surpluses make Thai bonds among the most favored by investors,” said Pongtharin Sapayanon, a Bangkok-based fixed-income manager at Aberdeen Asset Management Plc, which oversees about $428 billion. “The delay in U.S. rate increases has slowed the dollar’s strength, prompting the return of some foreign inflows to the region, especially Thailand.”

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