Asia Rates: Bond Supply Pressures in 4Q
- Curve steepening where bond demand may not sufficiently rise to smoothly absorb larger supply
- Upcoming FY22 ThaiGB issuances of THB1100-1300bn would represent a 45% increase over FY21
- Net CGB and LGB issuances to average CNY850-900bn per month in 4Q
- Bulk of proposed MYR45bn increase in COVID-19 Fund may be financed in 4Q via MGS/MGII issuances
- Implications for investors: Pay 5Y vs Receive 1Y CNY NDIRS idea (entry 0.215%)
Thailand: Normalization of financing strategy
Public Debt Management Office (PDMO)'s financing plans for FY22 (October 2021 - September 2022) indicate significantly larger Loan Bond (ThaiGB) issuances relative to prior years. Gross ThaiGB issuances are projected to amount to THB1100-1300bn in FY22, which would represent a 45% increase over FY21 (THB827bn) and 110% increase over FY20 (TH571bn). In the coming October-December quarter, gross issuances are planned to rise to THB273bn, from THB231bn in the prior July-September quarter.
The planned step-up in ThaiGB issuances largely reflects a normalization of financing strategy. Pre-pandemic, PDMO typically does the bulk of its financing via government bonds. However, during the pandemic, PDMO has relied heavily on shorter-term instruments such as Treasury Bills (TB), Promissory Notes (PN) and Term Loans (TL), to not overly burden the market with large duration supplies. Normalizing its financing strategy now could be because the capacity of PN and TL financing channels are getting limited and there could also be some desire to avoid accumulating too much roll-over risks from focusing on shorter-term instruments. Raising the share of long-term financing (ThaiGB issuance) could also be in anticipation of an increase in the debt limit to 70% of GDP.
We think BOT could allow the ~THB2.95tn outstanding stock of BOT Bills/Bonds to decline further, to provide incremental liquidity to help with the absorption of larger ThaiGB supply. This will provide some anchor for short-term bond yields up to ~5Y, but support for longer-tenor yields will likely be limited. Recently, BOT has also been buying ThaiGBs on a monthly basis, though sizes are probably not sufficiently large to cap long-term bond yields. In 4Q, we expect ThaiGB to underperform regional bonds, and the yield curve should steepen.
China: Issuances backloaded
Progress of central (CGB) and local government (LGB) bond issuances have been slow through July, and only started to pick up from August onwards. Due to the backloading, we are projecting net CGB and LGB issuances to average CNY850-900bn per month in 4Q, significantly higher than the CNY390bn monthly average in January-July. The large duration supply in 4Q will exert disproportionately greater upward pressures on long-term rates. On the other hand, we think short-term rates will be better anchored, due to PBOC staying supportive on liquidity to boost market sentiments and pre-empt liquidity shortfalls. We see good potential for CNY rates curves to steepen and express via a Pay 5Y vs Receive 1Y CNY NDIRS idea (entry 0.215%, stop-loss 0.100%, take-profit 0.400%).
Malaysia: Increase to COVID-19 Fund
The statutory debt limit is expected to be raised to 65% of GDP from 60%, primarily to fund an increase in ceiling cap for COVID-19 Fund to MYR110bn from MYR65bn. As of September, MYR60bn of the approved MYR65bn size had already been spent and total payment commitments had reached MYR91.8bn. This could suggest that the bulk of the proposed MYR45bn increase in Fund size may be financed in 4Q. If that materializes, net issuances of MGS/MGII could jump from MYR6-7bn monthly average in 1Q-3Q to ~MYR8-9bn in 4Q.
Compared to THB and CNY rates, we are more sanguine on curve-steepening pressures on MYR rates. We expect the larger MGS/MGII supply in 4Q to be smoothly absorbed by the investor base. MGS/MGII's FX-hedged/USD ASW yields have been quite attractive in recent quarters, which should continue to underpin the stable inflows from foreign investors (~USD1.0-1.5bn per month). Banks' bond demand is also expected to be strong so long as lending growth (to private sector) stays slow.
Report Links - 23-Mar-21 30-Mar-21 03-May-21 06-May-21 19-May-21 18-Jun-21
To read the full report, click here to Download the PDF.
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.