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Bond Bulls Face Reckoning in Thailand as Debt Supply Escalates

Bond Bulls Face Reckoning in Thailand as Debt Supply Escalates

Thailand’s government will be hoping bond investors have a healthy appetite, because it’s about to present them with an extra serving.

The Finance Ministry is ramping up debt sales in an effort to raise a major slice of the 1 trillion baht ($32 billion) it is borrowing for its financial-stimulus program. The dangers of this fund raising may even now be making themselves apparent, with a steeper yield curve and slackening demand at a recent debt offering.

The government has already raised about 260 billion baht of its target through a number of channels, including promissory notes, a savings bond, and regular government debt, a finance ministry official said last week. The nation may look to raise another 340 billion baht by September in an effort to bring the total to 60% of the stimulus amount, according to the Public Debt Management Office.

Bond Bulls Face Reckoning in Thailand as Debt Supply Escalates

Another batch of fiscal stimulus down the road can’t be ruled out either. The Bank of Thailand this month forecast gross domestic product will shrink by a record 8.1% this year as the coronavirus pandemic hammers the tourism- and trade-dependent economy. Customs exports tumbled 22.5% in May, the biggest drop in a decade, data released this week showed.

Investor sentiment appears to be taking a turn for the worse. Auctions of five- and 15-year bonds last week both drew bid-to-cover ratios of less than 1.5 times, versus an average of more than 2.3 times across 17 sales of different maturities this year. Longer-tenor bonds have underperformed, with the spread between two- and 10-year securities close to the peak of 74 basis points seen during the coronavirus sell-off in April.

While the yield curve has steepened, the central bank has so far stopped short of the heavy interventionist policies employed by its counterparts in Indonesia and the Philippines, preferring instead just to diversify its funding sources.

Savings Bonds

There are a number of steps the authorities may be considering to counter the yield-steepening move, some analysts say.

“The risk of higher long-tenor bond yields could partially be mitigated by the government increasing supply of short-to-medium maturity sovereign bonds and retail savings bonds as the previous savings bonds issued in May were heavily oversubscribed,” said Poon Panichpibool, a strategist at Krung Thai Bank Public Co. in Bangkok. Demand will also come from investors seeking government haven assets to hedge their credit risk, he said.

The bond market may also draw some support from the return of foreign investors. Overseas funds have bought a net $1.1 billion of Thai bonds in June, though there’s still a long way to go to offset the combined outflow of $4.4 billion in the previous four months. International funds have returned to parts of Southeast Asia, with Malaysian and Indonesian debt seeing net foreign inflows as early as April.

A key test of demand may come when the government releases its July debt-sale calendar, due some time around the end of this month. A modest increase may be well received by the market, whereas a big bump up in supply may end up giving some of them indigestion.

What to Watch

  • Markets will be looking for hints about the possible identity of the next BOT head after the deadline for applications was extended to July 10
  • Thai balance-of-payments data due Tuesday will be in focus following a rally in the baht
  • Manufacturing PMI data is due from Malaysia, Indonesia, Philippines, and Thailand on Wednesday, providing a glimpse of how these economies are recovering from the coronavirus shock
  • Indonesia will hold a conventional bond auction on Tuesday, with an initial target amount of 20 trillion rupiah ($1.4 billion)
  • Indonesia will announce inflation data on Wednesday, and Thailand on Friday
  • Malaysia will release trade balance figures for May on Friday after posting a record trade deficit the previous month

©2020 Bloomberg L.P.