Thai Bond Bulls Could Rejoice With GDP Data Expected to Disappoint

(Bloomberg) -- Thailand’s government bonds have staged a handsome recovery from their coronavirus sell-off in March. They may be set to make further gains on the back of two big events next week: first-quarter economic data and a central bank policy meeting.

The devastating impact of the pandemic has probably caused gross domestic product to shrink by 3.8% from a year earlier, the biggest decline in eight years, according to a Bloomberg survey of economists before the data is released Monday. The dismal performance is likely to be a positive for the nation’s sovereign debt however as it draws local investors to the assets as a haven.

“Long-tenor government bonds have seen robust demand from insurance companies and the Thai Asset Management Corp.,” said Jitipol Puksamatanan, head of market strategy at SCB Securities Co. in Bangkok. This has been due to investors seeking to lock in yields amid the deflationary environment, as well as switching away from riskier corporate bonds, he said.

The Bank of Thailand is poised to deliver another positive for the nation’s government bonds Wednesday if it cuts interest rates again as economists predict. Policy makers will lower their benchmark by 25 basis points, adding to the 50 basis points of easing already delivered this year, according to the majority of respondents in a Bloomberg survey.

While the pandemic has roiled markets around the world in recent months, Thailand’s bonds have had a particularly wild ride. Benchmark 10-year yields jumped by more than 90 basis points from their low in March as the outbreak spurred foreign investors to cut holdings of the nation’s debt. The yield has since dropped by about 70 basis points from its peak as local investors transferred funds into the nation’s safest fixed-income assets and away from corporate debt.

The flow toward safety saw the spread on an index of Thai corporate debt over a gauge of government bonds spike to a record high of about 230 basis points in early April, according to data compiled by Bloomberg. The sell-off in corporate securities has spurred the central bank to take a number of steps to calm the market, including providing a liquidity backstop and making funds available to firms to refinance maturing debt.

READ: THAILAND PREVIEW: 1Q GDP to Contract as Virus Hits Tourism

Demand for corporate bonds is likely to remain weak with the nation’s sluggish growth outlook set to weigh on credit fundamentals. Even though next week’s GDP data is set to be dismal, the International Monetary Fund predicts there is probably even worse to come, and has forecast the economy will shrink 6.7% this year. Although Thailand said Friday that malls and retailers will be allowed to partially resume operations, tourism is unlikely to pick up anytime soon as the nation’s airspace will still stay shut for another month.

While haven demand is attracting local investors to Thai government debt, there’s unlikely to be much interest from foreign funds just yet. The nation’s 10-year bonds only offer a yield premium of around 45 basis points over similar-maturity U.S. Treasuries, with cross-currency basis swaps adding only a very meager yield pick-up over that for dollar-based investors seeking to hedge their baht exposure.

While emerging-market currency volatility has come down from its March peak, that for Group-of-Seven foreign exchange has fallen even faster -- with the spread between the two close to an 18-month high -- and this is also likely to further deter foreign investors from speculating on the baht.

What to watch

• Bank Indonesia meets next Tuesday, with a majority of economists surveyed by Bloomberg expecting a 25 basis point rate cut. Indonesian bonds have rallied this week following robust demand at an auction of Tuesday, and a decision to further ease will probably provide another short-term boost
• Malaysia’s April headline inflation print is due on Wednesday, after the nation reported deflation the previous month. Sluggish inflation pressures continue to buttress real yields in Southeast Asia

©2020 Bloomberg L.P.