Thai banks awash with cash are propelling a record rally in sovereign bonds. With economic growth stuck below 3 percent, that shows no signs of abating.
Baht-denominated sovereign notes have risen 2.9 percent in March and are headed for an unprecedented ninth monthly gain, according to a Bloomberg index that goes back to the start of 2010. The debt has returned 6.3 percent this year, second only to Indonesian securities in Asia, and the 10-year yield dropped to a record last week.
Prime Minister Prayuth Chan-Ocha has failed to lift economic expansion since taking over in a military coup in May 2014, with Thai growth trailing its Southeast Asian peers by at least two percentage points last year. That’s resulted in sluggish lending that hasn’t kept pace with growth in deposits. Insurers, pension plans and social security funds have a lot of extra cash so demand for debt will be sustained, according to Yingyong Nilasena, chief investment officer at the Government Pension Fund overseeing $10 billion.
“As long as excess deposits continue to build in the banking system and loan demand doesn’t pick up, Thai bonds are likely to see continued interest,” said Manu George, a Singapore-based Asian fixed-income investment director at Schroder Investment Management Ltd., which oversees $440 billion globally.
Deposits at Thai commercial banks have increased 10 percent since May 2014 to 12.3 trillion baht ($348 billion) at the end of January, central bank data show. Outstanding loans rose 6 percent to 13.5 trillion baht over the same period.
The Thai economy expanded 2.8 percent last year, compared with 4.8 percent in Indonesia, 5 percent in Malaysia and 5.8 percent in the Philippines. Businesses are operating at around 60 to 65 percent of their capacity and the private sector doesn’t want to borrow because of weak global demand and subdued domestic consumption, said Nattariya Wittayatanaseth, a market and economic research specialist at Kasikornbank Pcl in Bangkok.
The yield on 10-year Thai government bonds has fallen 71 basis points this year to 1.81 percent and reached a record low of 1.77 percent on March 18. Similar-maturity Malaysian and Indonesian notes offer yields of 3.87 percent and 7.78 percent, respectively. Foreign funds have pumped $4 billion into Thai securities this year as the baht rallied 2.2 percent against the dollar.
Demand to Rise
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Demand for Thai debt could rise more than the annual average over the past five years as retail investors seek the safety of fixed-income securities due to a planned cut in deposit protection, said Thai Bond Market Association President Tada Phutthitada. Only 14 percent of sovereign debt is held by foreigners, compared with 39 percent in Indonesia and 31 percent in Malaysia, making locals the dominant force.
“The yields are at an unprecedented low but the money needs to be parked somewhere,” said Yingyong at the Government Pension Fund in Bangkok. “We may also see more fund inflows from foreign investors, which primarily speculate on the possible strength of the baht.”
The Bank of Thailand cut its benchmark rate twice in 2015, to 1.5 percent, and six of 23 economists surveyed by Bloomberg see one or more reductions by the middle of the year. Exports fell for 13 straight months through January and the consumer-price index has declined every month since the start of last year.
While Prime Minister Prayuth is pushing infrastructure projects and stimulus measures for farmers and small businesses, the World Bank still sees growth slowing further to 2 percent this year.
“Lingering speculation of a rate cut by the Bank of Thailand later this year and prolonged deflation are supportive for bonds,” said Takahide Irimura, a senior economist at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. “Some foreigners may accelerate inflows as they aim to gain from currency appreciation.”
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