THB & MYR Rates: Differing risk profiles


Differing inflation and external balance risk profiles point to MYR being more resilient than THB rates.
Duncan Tan, Eugene Leow06 Apr 2022
  • Above-target inflation and weaker current account outlook require high risk premium in THB rates
  • Pullbacks in THB rates, on BOT dovishness, should be seen as good opportunities to enter payers
  • Malaysia‚Äôs more favourable macro fundamentals suggest that MYR rates would be better-anchored
  • EPF's liquidity needs are expected to rise. We turn cautious on long-duration MGS/MGII
  • Look to pay THB OIS/IRS on pullbacks. We close our long 20Y MGS vs pay 5Y MYR IRS idea
Photo credit: AFP Photo


THB Rates: High risk premium required

We expect Bank of Thailand (BOT) to be a laggard in terms of policy normalisation, however, we do not think that THB rates would necessarily outperform or be more stable against the rising core rates environment. In fact, we see THB OIS rates and ThaiGB yields cheapening more than regional rates markets.

Above-target inflation (BOT forecasting 4.9% for 2022), weaker current account outlook on elevated energy prices (BOT forecast for 2022 has swung from USD1.5bn surplus to USD6bn deficit) and heavy FY22 bond supply are key factors that will require a high level of risk premium to be priced into THB rates. THB rates' low starting levels (relative to peer EM low yielders) and high beta to USD rates also suggest relatively more scope to cheapen.



We do recognise that BOT could stay dovish for some time and occasionally push back against markets' hike expectations, leading to pullbacks/dips in THB rates. Such pullbacks/dips should however be seen as good opportunities to enter payers as we think markets would persistently price in a high level of risk premium and non-negligible likelihood of a future hawkish pivot by BOT. Specifically, we think 1Y THB OIS below 0.65% and 5Y OIS below 1.60% would be attractive levels to pay. We hold onto our running idea of pay 2Y THB NDIRS initiated on 14 March.

MYR Rates: Lower inflation and external balance risks

While we expect MYR rates to also rise alongside core rates and around impending Bank Negara Malaysia (BNM) rate hikes, Malaysia’s more favourable macro fundamentals suggest that MYR rates would be better-anchored (rise by a smaller quantum).

In recent months, inflation prints have been rangebound between low-2% and low-3% YoY, rather than breaking higher as in some peer Asian economies. On the current account, BNM is forecasting a large surplus balance of 4.2-4.7% of GDP in 2022 vs 3.5% of GDP in 2021, as Malaysia benefits from higher palm oil and natural gas export prices. Therefore, unlike THB rates, we expect lower inflation and external balance risks to translate to smaller upward pressures on MYR rates.

Furthermore, there is buffer between current market pricing of three BNM hikes for 2022, vs our forecast for two. As such, even if inflation prints were to moderately rise in the coming months, or BNM were to start hiking in May (earlier than we expect), any resultant upward repricing in MYR rates is likely to be modest.
We turn cautious on long-duration MGS/MGII bonds, because of recent Employee Provident Fund (EPF)-related news. In April, EPF members under 55 years of age would be allowed to make another round of withdrawals, up to MYR10,000, from their retirement accounts. Potentially, up to MYR63bn could be withdrawn and would imply that EPF's liquidity needs would rise (to meet member withdrawals) and consequently, their buying capacity for long-duration MGS/MGII bonds could be adversely impacted.

Considering that market pricing of BNM rate hikes is likely to be well-anchored, and weaker EPF bond demand could weigh on long-duration MGS/MGII bonds, we are taking off our long 20Y MGS vs pay 5Y MYR IRS idea.




To read the full report, click here to Download the PDF.

Duncan Tan

Rates Strategist - Asia
duncantan@dbs.com

Eugene Leow

Senior Rates Strategist - G3 & Asia
eugeneleow@dbs.com


Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.