Bond Outlook

Flush liquidity and monetarypolicy easing expectations are keeping frontend yields very low, and in the case of Thailand, below the Bank of Thailand's policy rate of 1.5 per cent.

Meanwhile, lack of demand by insurance companies (who are typically natural buyers of longdated paper) is resulting in underperformance at the long end of the curve. This is evident by tepid participation in the primary market, where longtenor auctions are being met with just a lukewarm reception.

We expect the yield curve to remain steep in the coming months, since we expect the Bank of Thailand to cuts its policy 1day repo rate by at least another 50 basis points to 1 per cent by the end of the second quarter, with risk skewed towards further cuts, if the economic outlook continues to deteriorate.

Inflation is expected to dip further into negative territory in the coming months, which offers scope for the central bank to cut rates further.

Supply remains a risk factor.

The Finance Ministry has warned that tax revenues may fall short by at least Bt150 billion versus its target of Bt1.58 trillion.

As a consequence, the government bond supply schedule may be increased yet again, which could exert bearishness at the belly and long end of the curve.

As a strategy, we favour positioning at the front end of the curve for now.

However, steep yield curves offer an opportunity to extend duration for an attractive yield pickup, although we would prefer to wait for more clarification on supply.