Divergent fortunes await Thai and Malaysia debt on virus outlook


SINGAPORE • Longer-tenor Thai and Malaysian bonds saw robust demand in July but their fortunes may diverge from here.

The spread between five- and 10-year ringgit debt tightened by 18 basis points (bps) last month, while the gap on Thai securities narrowed by 19 bps.

Thailand’s yield curve could flatten further as the nation’s tourism sector languishes while Malaysia’s may steepen once rate-hike bets gain traction, according to DBS Bank Ltd.

Investors have gravitated toward longer-dated securities as a worsening virus outbreak in South-East Asia fuels expectations for yields to remain low for a while.

Regional economies have had varying degrees of success in rolling out vaccines, setting the stage for an uneven pace of recovery which may prompt money managers to become more selective.

“The Thai bond curve is biased toward more flattening because the domestic vaccine rollout has been slow and the timeline for tourism recovery is at risk of being pushed out further,” said Duncan Tan, a strategist at DBS Bank in Singapore.

Malaysia could see “a turnaround in infection rates, which would allow rate hike expectations to rebuild and the curve to steepen”, he added.

About 5.7% of Thailand’s population has been fully vaccinated, compared to 22.1% for Malaysia, according to data compiled by Bloomberg.

Thailand is expected to achieve herd immunity after 2022 while Malaysia aims to reach the milestone by year-end.

Investors have recently extended duration at auctions in both countries. Malaysia’s 2050 bond sale yesterday saw a rebound in the bid-to-cover ratio compared to the previous offer in March.

A 10-year Malaysian Islamic note auction last week recorded the highest bid-to-cover ratio for a sovereign offering this year.

In contrast, the ratio for a five-year auction on July 22 was the lowest so far in 2021.

A similar trend was evident in three auctions that have taken place since June 22, with robust appetite for 15- and 20-year notes and lacklustre demand for three-year debt.

In Thailand, a sale of 2042 bonds on Wednesday logged a bid-to-cover of 1.87 times, the highest for the notes since they were issued last year.

Similarly, demand for an offering of 2049 debt on July 21 increased from May, while a sale of 2024 notes on the same day recorded a drop in bids.

Despite the flattening in the sovereign curve, the long end remains cheap relative to historical levels, especially for Thai bonds.

The spread between five- and 10-year baht notes is 1.8 standard deviations (sd) higher than the five-year average differential, while the same gauge for Malaysia stands at 1.3 sd.