THE Thai bond market remains attractive for investors despite a weakening in the baht triggered by a hardening of positions by the protagonists in a global trade war, a securities expert says.
The declines in the baht against the US dollar have spooked foreign investors, resulting in a sell-off of short-term bonds that has reached Bt81.9 billion this year, said Tada Phutthitada, president of the Thai Bond Market Association (ThaiBMA), yesterday. The currency’s depreciation has seen foreign holders of bonds with a maturity less than a year left with losing positions on their investments, Tada said.
In contrast to the pressure on short-term bonds, foreign investors have bought Bt84 billion in long-term bonds, resulting in net purchases of Bt2.1 billion – against their net sales of more than Bt190 billion in the stock market.
Foreigners have been investing in government bonds and central bank bonds, while shying away from corporate bonds.
"The bond market is expected to be subject to further volatility until the trade tensions between the world's two largest economies ease,” said Tada.
The US government yesterday announced that it will impose tariffs of 10 per cent on Chinese goods in the next few months. The announcement sent Asian stock markets down sharply as investors worried about the escalating trade war. The US has accused China of practising unfair trade and, on July 6, slapped tariffs on a list of Chinese products worth $34 billion. Beijing has responded with tariffs of equal value on US imports.
The trade dispute, along with the projected further increases in US interest rates, has driven the US dollar higher against other currencies, including the baht, which has dropped 1.6 per cent this year.
Although interest rates in the domestic market are usually lower than the US rates, the real returns on bond investment are expected to be higher due to lower inflation, Tada said.
He cited as an example that on June 18, the yield on 10-year US government bonds was 2.82 per cent, compared with a yield of 2.79 per cent on equivalent Thai government bonds. However, the inflation rate in US was about 2 per cent, against the Thai rate of about 1 per cent, so the returns on investment to bond maturity in the Thai bonds are higher, he said.
Yields on two-year and 10-year bond Thai government bonds had increased gradually - at 22 and 25 basis points, respectively - in the first half of the year.
Foreign investors hold local bonds representing 8 per cent of total outstanding bonds – covering government and corporate bonds - worth Bt12.2 trillion, Tada said.
The ThaiBMA was not overly concerned about foreign investors selling short-term bonds, which were mostly issued by the Bank of Thailand.
The central bank issued short-term debt in order to draw back some of the excess liquidity resulting from the expansionary monetary policy that has kept interest rates low for a long time.
“The central bank may be happy about the outflows as it could reduce costs by reducing short-term bond issuance and the weakening baht would benefit exporters," said Tada.
The ThaiBMA expects large firms will issue more corporate bonds in the second half of the year, after long-term bond issuance rose 1.4 per cent to Bt435 billion in the first six months of 2018. This would bring total long-term corporate bond issuance to between Bt760 billion and Bt800 billion by the end of this year. Last year saw record-breaking issuance of Bt830 billion.
Large firms are expected to take advantage of low interest rates and look for merger and acquisitions, Tada said. Short-term debt issuance was worth Bt1.5 billion in the first half of the year, up 30 per cent.
Thailand can depend on its savings, as capital outflows from the stock market would not have much effect on interest rates in the domestic market, said Tada, adding that investors could borrow more cheaply at home compared with US-denominated debt.
Thailand, with its large current account surpluses since 2006, could withstand capital outflows, in contrast with some other emerging economies that would need to start raising interest rates, Tada said.