Expectations of further front-loading of rate hikes—The Bank of Thailand began normalizing its monetary policy when it raised the benchmark interest rate by a quarter of a point to 2.25 percent on Jan. 12 following a similar increase in December, and many analysts now project a cumulative 75bp rise during the remainder of the year—have in turn flattened the front-end of the NDIRS (non-deliverable interest rate swap) curve.  Moreover, because the floating legs for Thai rate swaps are derived from both interbank rates as well as forward dollar/baht market rates, front-end rates have been under added pressure (in a rising rate environment) as the central bank’s recent round of three and six-month currency forward purchases (to sterilize spot buying of dollars, more evidence that in fact EM bond flows are stickier than equities regardless of inflation) has drastically narrowed the gap between the 6m fixing rate and policy rates.  In sum, spreads between 1-2 and 2-5 year swaps have tightened considerably this month while domestic bond yields have also increased in kind, reflecting what analysts term “rising but manageable” inflation pressures given that food and energy prices may be contained going forward by favorable (cooler and wetter than normal) weather patterns and the government’s use of an oil levy fund, respectively.  Interestingly, the aforementioned rise of short-end swaps may already be “overdone”, per Lum Choong Kuan, head of fixed income research at CIMB Investment Bank, especially if the market has overshot on its rate normalcy projection.  That said, movement in the 6m fixing rate may not be done, and as such swap spreads have room to tighten further.  Rahul Bajoria, an analyst with Barclays, mentions for example that “the rise in the fixing rate may continue in the coming weeks as Thai asset managers, who invested heavily in FX-hedged, short-term Korean bonds, are likely to repatriate those investments, given that the attractiveness of Korean money market investments has declined significantly.”

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