Barclays sees gain as Malaysia, Thai rates diverge

by **Cals** Fri 22 Nov 2013, 14:12

Business & Markets 2013

Written by Bloomberg

Friday, 22 November 2013 10:34

(Nov. 22): Barclays Plc and Nomura Holdings Inc. are recommending investors seek to profit from diverging central bank borrowing costs in Malaysia and Thailand.

Malaysia’s one-year onshore interest-rate swap is 3.26 percent, signaling a possible increase in the 3 percent policy rate that will next be reviewed in January. Thailand’s similar contract almost matches the 2.5 percent benchmark rate. Nomura recommends clients receive the two-year swap in Thailand and pay the equivalent rate in Malaysia. Barclays advises buying Thai three-year bonds and selling like-maturity Malaysian debt.

Malaysian Prime Minister Najib Razak’s increases in the prices of subsidized fuel and sugar to contain the budget deficit and shore up the current account spurred the fastest inflation in 20 months in September. By contrast, Thailand’s government cut its 2013 growth forecast to 3 percent this week, from as high as 4.3 percent, amid a fresh bout of civil unrest.

“The Bank of Thailand will remain dovish for the foreseeable future versus Bank Negara Malaysia, which will turn hawkish with time as inflation and growth rise,” Vivek Rajpal, a Singapore-based rates strategist at Nomura, said in a Nov. 20 interview. “We will see the Malaysian rate curve start building with rate-hike expectations.”

Malaysia’s gross domestic product increased 5 percent in the third quarter from a year earlier, the most this year and more than the 4.7 percent median estimate in a Bloomberg survey, official data show. Exports rose in each of the three months through September as global demand picked up. Inflation will accelerate to 2.7 percent in October, according to a Bloomberg survey, from 2.6 percent the previous month.

Inflation Divergence

The economy of its northern neighbor expanded 2.7 percent, the least since the first three months of 2012. Thai overseas shipments fell in four of the five months through September and tension sparked by a proposed amnesty law for political offenses is threatening to curb tourism and investment. The slowing growth contributed to inflation easing for nine consecutive months to 1.42 percent in September before quickening slightly to 1.46 percent last month.

The yield on Thailand’s 10-year government bonds rose 28 basis points this month to 4.22 percent, while Malaysia’s increased 45 basis points to 4.06 percent, data compiled by Bloomberg show.

The divergence in inflation is one reason to shift funds from Malaysian to Thai debt, Rohit Arora, an emerging Asia interest-rate strategist at Barclays in Singapore, said in a Nov. 19 interview. Bank Negara Malaysia, which has held its benchmark rate since mid-2011, will raise it to 3.25 percent in the second quarter of 2014, and the Bank of Thailand will hold through June, he said.

Accommodative Policy

The Thai central bank kept its key rate unchanged for a third meeting in October after reducing it by 25 basis points in May. Accommodative monetary policy remains appropriate because of weak economic growth and low inflation, Governor Prasarn Trairatvorakul said on Nov. 13.

“There may even be scope for an interest-rate cut” in Thailand, Anders Faergemann, a London-based senior portfolio manager who helps oversee $4.3 billion of emerging-market fixed- income assets at PineBridge Investments, said in a Nov. 19 e- mail interview. His funds are “underweight” on Thai debt, meaning they hold less than the benchmark index, because the bonds offer relatively low yields, he said.

The premium investors demand to hold Thai 10-year notes over similar-maturity Treasuries narrowed 34 basis points this year to 141, data compiled by Bloomberg show. The comparative gap for Malaysian notes shrank 47 basis points to 125.

Real Yields

“We’re a bit more cautious on Thailand,” Rajeev De Mello, who manages $10 billion as Singapore-based head of Asian fixed income at Schroder Investment Management Ltd., said in a Nov. 19 interview. “We generally had Thai yields going up by much less than U.S. Treasuries, and so the spread between the two is coming down. At the levels where they are now, I don’t think they are particularly interesting.”

The baht has weakened 3.8 percent this year to 31.8 per dollar, and will rally 1.6 percent to 31.3 by the end of the year, according to the median estimate of analysts surveyed by Bloomberg. The ringgit fell 4.7 percent to 3.2073 and will recover 0.9 percent to 3.18 by Dec. 31, another survey shows.

Because of its low consumer-price gains, Thailand’s real yield is the highest among Southeast Asia’s five major economies. Five-year baht-denominated notes pay investors 2.32 percent after accounting for inflation, data compiled by Bloomberg show. That compares with a similarly adjusted yield of 1.04 percent in Malaysia.

“Thailand’s inflation will probably remain low and more stable than its Southeast Asian peers as its domestic demand stays quite weak,” Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management Co. which manages $37 billion, said in an interview on Nov. 19. “I don’t see any factors for the Thai bonds to underperform their regional peers at least, and it is possible they will outperform on a relative basis.”