China reopening is good for Thai bonds

China’s reopening is set to further bolster Thai bonds, which are bouncing back from their Covid-induced losses amid signs that inflation is peaking.

Baht-denominated sovereign debt has jumped nearly 15% since the end of September, the best return in emerging Asia for dollar-based investors after South Korea, according to data compiled by Bloomberg. The rally may gather further momentum as the market appears to have already priced in all the likely interest-rate hikes from the Bank of Thailand.

The central bank has increased its key rate by 75 basis points since in August to tackle inflation. Policy makers will increase the benchmark by another 50 basis points by the second quarter of 2023 before pausing, according to a Bloomberg survey.

The market has almost fully priced in the extra half-percentage point move, with the two-year Thai government note yielding nearly 50 basis points above the policy rate. That compares with an average spread between the two of close to zero in the five years before Covid.

The need for further tightening is becoming less acute as inflation looks to be peaking. The consumer price index has been below forecasts in each of the five months through November and has dropped from its peak of 7.86% in August.

“Core inflation could reach the peak as early as this quarter, which is why the Bank of Thailand does not face as much pressure from inflation compared to the US and other central banks,” said Poon Panichpibool, a global markets strategist at Krungthai Bank.

Optimism surrounding China’s reopening has been a driver of the return of foreign fund flows to Thailand, helping the baht to strengthen more than 6% over the past three months. The currency was trading close to 34.50 last Thursday.

Despite the gains, the baht still appears relatively undervalued, with its real effective exchange rate 4% below its five-year average, analysts say.

Global funds have poured $3.2 billion into Thai bonds since the end of September, after pulling money out in four of the previous five months.

“China’s reopening will be supportive of Thai bonds via attractive expected currency returns, which will lure in foreign investors,” said Mr Poon. Global funds “anticipate the baht to appreciate to the 33 per dollar level earlier than expected”, he said.