THB & MYR Rates: Differing risk profiles

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.