Thai Bonds Lose Appeal

[Taggart]

Around Asia's markets: Thai bonds lose appeal

Bloomberg News

Published: January 14, 2007

SINGAPORE: Global bond fund managers are boycotting Thai debt because of government curbs on foreign investors, raising borrowing costs in Thailand, the second-biggest Southeast Asian economy.

ING Investment Management, said it would stop buying Thai bonds after the Thai central bank said Dec. 18 that it would fine investors who sell assets within a year of purchase. Aberdeen Asset Management in Bangkok, part of the Scottish fund group focused on Asia, sold half of its Thai bonds due in 10 years or more, said Pongtharin Sapayanon, a fund manager at Aberdeen Asset Management.

"We won't be investing," said Joel Kim, a fund manager in Hong Kong at ING. "There's going to be very little foreign involvement."

Fund managers are wary because the government has revised investment rules six times since September, when the military seized power in a bloodless coup. Standard & Poor's last week said it would lower the outlook on $44.1 billion of Thai debt should an exodus of investors slow economic growth.

The yield on the Thai benchmark 5.4 percent bond due July 2016 has climbed 19 basis points, or 0.19 percentage points, to 5.06 percent since Dec. 18, according to prices from the Thai Bond Market Association.

The government plans to sell 3.5 billion baht, or $97 million, of debt due in 2026 on Wednesday. Based on the closing price Friday, the yield may rise to 5.64 percent from 5.09 percent set at a Dec. 6 sale, adding about 19 million baht to the government's annual interest costs.

Yields on 10-year bonds may rise to 5.5 percent and 20-year yields may increase to 6 percent by year-end should the Bank of Thailand maintain currency controls and if rating companies cut local-currency debt rankings, said Christian Carrillo, an Asia bond strategist at Deutsche Bank in Singapore. He is telling clients to stay away from the securities.

Foreign investors cut their holdings of Thai government and corporate debt to about 100 billion baht from 107.2 billion baht at the beginning of December, the Thai Bond Market Association said.

A sale of 10-year securities on Dec. 27 drew bids worth 1.1 times the debt on offer. Investors wanted to buy an average of 2.5 times the amount auctioned in the previous 11 sales.

Bonds gained 1.77 last week and the yield fell 24 basis points from Jan. 5 as the Thai SET stock index dropped to a two-year low, prompting Thai investors to buy debt. Government securities also gained on speculation the central bank will cut interest rates as soon as Wednesday after economic growth slowed to an annual pace of 4.7 percent in the third quarter.

Thai bonds rallied after the coup toppled Prime Minister Thaksin Shinawatra. Investors bet the new government would end a political stalemate and push through road, subway and power projects to revive the economy. Instead, the regime drafted rules to stem a 16 percent rise in the baht against the dollar last year and to shield companies from foreign takeovers.

The currency controls require banks to keep 30 percent of money entering the country for at least a year. Investors who try to withdraw early only get two-thirds back. The government exempted stockholders after equities plunged, leaving bond investors to face losses.

Regulations introduced last Tuesday give foreign investors two years to cut their stakes in local companies to less than 50 percent. Kim Eng Tan, an analysts at S&P's in Singapore, said in an interview that there was a growing chance the outlook for the A rating of Thai local-currency debt would be cut as falling investment slows growth.

"The way the measures were implemented was wrong and eroded confidence," said Marc Faber, founder of Marc Faber Limited in Hong Kong, which manages about $300 million in assets.

Faber, who lives in Thailand, said he would not invest in Thai bonds because a "severe correction" in global markets will push yields higher in emerging markets.

Rajeev De Mello, head of Asian bonds at Pictet Asset Management in Singapore, added to his bet that Thai yields would decline the day after the currency restriction was announced. He bought interest-rate swaps that pay him a 10-year fixed rate of about 5.40 percent in exchange for a three-month Thai floating rate, now 5.25 percent. De Mello will profit as Thai rates fall.

"The view we had was that it would hit confidence," said De Mello. "The stock market confirmed that immediately. That will encourage the Bank of Thailand to cut rates."

[Martin]

My reading of this OP makes me feel that the BoT has succeeded in doing what they saw was necessary in the days just before 18 December, when they slapped on the '30% withold' rule to cool off a dangerous overconfidence among the 'hot money sloshers'.

I say this because I was getting 'tips' to "invest in the thai baht". But what was really meant was "speculate in the thai baht, and make a quick capital gain". That is, the tipsters must have felt that the baht could be driven up very significantly (say to 30THB to US$1, to give speculators a 20% gain).

Both the short term and the long term effects would have been nasty. In the short term, exporters who had sales contracts under which they were to be paid in dollars would have been forced to accept big losses. And in the longer term, it would have resulted in similar conditions that led to the 1997 crisis.

I see that nine days later, the BoT could find enough buyers for its bonds (in fact, 10% more than just enough).

That looks to me as if they got it right.

And ceasing to be a target of the 'fund managers' quoted is probably a good thing (like it is always best to be a less-attractive target for burglars than your neighbours are!).

It is high time that we started pointing out when the word 'investment' is being wrongly used, and the word 'speculation', or even 'gamble', is nearer the mark.