The road ahead for Brexit and impeachment; Favor 3Y Thai bonds
The US dollar was relatively calm on US Congress Speaker Nancy Pelosi’s announcement that the House of Representatives will start a formal impeachment inquiry into US President Donald Trump. First, the House Judiciary Committee will pass the articles of impeachment. This would deal with the allegation that President Trump pressured Ukraine to investigate former Vice President Joe Biden, the potential Democrat candidate for the 2020 US presidential election. Once the articles are presented to the full House, it can proceed to vote on impeachment. The Democrats hold 235 seats and have the majority in the 435-seat house. According to the New York Times, only 185 lawmakers have supported an inquiry, still short of the simple majority of 218 votes needed to pass. Even if it passes, it all but impossible that a two-thirds majority in the Republican-controlled Senate will vote to remove President Trump from office.
The British pound could not rally past 1.25 against the USD on the UK Supreme Court ruling against Prime Minister Boris Johnson’s suspension of Parliament. The House of Commons is scheduled to reconvene today with MPs clamouring for Mr Johnson to resign upon his return from New York. Mr Johnson is likely to maintain his combative stance; the ruling has galvanized the support of Tory Brexiters behind him. Unless MPs find a way to remove Mr Johnson constitutionally and push for a Brexit extension, the risk remains for the UK to exit EU without a deal on October 31. Pushing for a no-confidence vote could also backfire. Apart from blocking the Prime Minister, there is no confidence that the fragmented political parties can come together to form an alternative government. Failure to do so would open the door for Mr Johnson to call an election after October.
THB Rates: Favor 3Y government bonds
Foreign buying of Thai government bonds has been weaker than expected despite reduced political uncertainties post general elections and THB outperformance. Aggregate outflows have reached USD1.5bn year-to-date with net selling seen in 6 out of 8 months (vs 2018 inflows of USD4.5bn). We think bond investors could be quite underweight Thailand, possibly because yields are one of the lowest in EM. Therefore, Thai bonds’ high total returns in 2019, primarily driven by price and FX, might have caught some investors off-guard.
THB has proven to be resilient over recent episodes of US-China escalations and bouts of CNY volatility. Against the current trend in Asian bonds where strong fixed income returns are being partially offset by FX losses, the strength of THB gives Thai government bonds a clear edge over peers. We think Thai bonds, specifically the 3Y tenor, could do well in the short-term. There could be scope for 3Y yields to decline 10-15bps before year-end. Bank of Thailand (BoT) has been cutting bill issuances to discourage speculative inflows and that could disproportionately benefit the front-end. We also see BoT making one more policy rate cut in 4Q which should help to pull 3Y yields lower (3Y yields tend to trade close to policy rates).
Beyond 2019, the performance outlook for Thai government bonds could weaken. A possible US-China interim deal would remove much of the safe-haven bid for THB and Thai bonds. In addition, Thailand’s weight in the GBI-EM Global Diversified Index, a key benchmark for EM government bonds, would be reduced by ~1% in 2020 (to make room for China’s inclusion).
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