Thai Yield Spreads Widen on Protests

The widening spread in Thai baht two- and ten-year government bond yields largely reflects heightened political tension in recent weeks. Initially driven by rising US Treasury yields in mid-2013 (putting upward pressure on Thai ten-year government bond yields), steepening in the baht curve is now driven by lower yields on two-year baht government bonds as the
market begins to price in more accommodative monetary policy in the next few quarters. Notably, the two- to ten-year spread is already at 150 basis points, levels not seen since mid-2010.

While not our core view, an escalation in political tension certainly increases the risk of rate cuts in the immediate term. But this should not have a significant impact on longer-term bond yields, which are more likely to be determined by inflation expectations. In any case, considering that there are no immediate price pressures or external funding concerns, we expect the two- to ten-year spread to stay wide as long as political tensions persist. Meanwhile, Thailand’s five-year US dollar credit default swap (CDS) spread has spiked to 158 basis points from 106 basis points in October. As a result, Thailand’s CDS spread has diverged from Malaysia’s (both tend to track closely). Currently, Thailand’s CDS spread over Malaysia’s is in line with those seen during other Thai protests over the past few years.