CIMB THB Monthly Fixed Income Commentary for May 2015

• Thailand’s government bonds weakened as the yield curve steepened. The 10-year government bond surged 26bps in May alongside the very weak THB, which rose to a high of 33.927 during the month. However, a small rebound is expected. Short term (next two weeks), we think swap rates will show minimal decline (0-5bps) but swap spreads against bonds would stay in range (-10bps to -20bps for the 5X5). Our short term 1 week target for the 10-year Thai govvies is 2.87% (drop of 10bps) going towards next support at 2.75%. Exit for this trade 3.10%.
• Alongside the surging US dollar, the baht itself weakened considerably since Bank of Thailand (BoT) cut rates twice this year, whilst recent BoT measures to boost capital flows further dampened the currency. The BoT measure include allowing Thais to purchase foreign currencies for deposits up to $5 million (rising from $500,000 formerly), and allowing purchase of overseas properties up to $50 million per year ($10 million prior). The baht 1M implied volatility has surged to 6.98% latest, from around 5.00% a month ago.
• Corporate bonds trading continue to be slanted towards short tenor papers, with investors shortening duration seeing the spike in govvies yields. For the month of May, we noted indicative short tenor (<3 years) yields down about 5bps, but longer tenor yields higher by nearly 10bps. In the coming couple of weeks, stay short duration. We recommend buying bonds with maturity less than 5 years. On our radar include Toyota Leasing (TLT175B) (AAA), Ananda Development (ANAN185A) (BBB-), and Quality Houses (QH178B) (A-).