Thai Bond Bulls May Need To Temper Hopes As Rally Seen Overdone

(Bloomberg) -- A 7% gain in Thai bonds has turned them into one of emerging Asia’s best performers this quarter but there are signs to suggest the rally may be about to end.

Baht-denominated notes may find it hard to extend their winning run as the Bank of Thailand has signaled an extended rate pause and bond supply looks set to increase. These headwinds are likely to erode the gains sparked by the Federal Reserve’s recent policy pivot.

One of Asia’s lowest yielders, baht securities tend to display a higher sensitivity to movements in Treasuries — a phenomenon that has worked in their favor as US debt rallied in recent weeks. But the odds are fast stacking up against Thai bonds, with inflation expected to quicken next year as the government disburses a $14 billion cash handout.

“For the front-end to belly part of the sovereign curve, the yields are too low based on my forecast for a rate hold from the Bank of Thailand in 2024,” said Poon Panichpibool, a strategist at Krung Thai Bank. Yields are expected to rise given the rate-pause outlook, he said. 

The yield on five-year Thai bonds fell 41 basis points this quarter to head for the biggest three-month drop since end-2022.

The nation’s two- and five-year yields stand at 2.35% and 2.49%, respectively, to hover below the Bank of Thailand’s benchmark rate of 2.50%. Yields on mid-dated bonds have not remained below the policy rate for more than four months at any one time over the past decade, according to data compiled by Bloomberg.

Bonds may come under pressure as Krung Thai Bank and Goldman Sachs Group Inc. caution that the Bank of Thailand is likely to keep interest rates on hold in 2024 amid upside risks to inflation. Price pressures are expected to quicken once the authorities disburse $14 billion of cash aid under a digital wallet program that will cover 50 million people. 

To make matters worse, investors may have to contend with a heavier supply pipeline as the government proceeds with plans to tap the debt market to fund 500 billion baht ($14.3 billion) of cash handouts. The government should be able to finalize the measure by the second quarter, and this will also weigh on bonds, Krung Thai’s Poon added.

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