Attractive roll-down on the THB curve

The recent rise in Thai baht (THB) swap rates - a spill-over effect of the global bond market sell-off and bear steepening of the curve - provides a good opportunity for roll-down trades. THB 5Y swap rates spiked c.30bps from last month's lows and have fully reversed the rally following the Bank of Thailand's (BoT) surprise rate cut in April. 

Domestic banks have parked their excess liquidity in THB bonds since H2-2014 due to delays in project execution. They have used the back-to-back cuts in BoT policy rates to take profit on their fixed income portfolios. This, combined with thin secondary market liquidity, has exacerbated the bear steepening move. 
As volatility in THB rates settles down, we look for the best opportunity to position for a roll-down on the THB swap curve while maintaining our Positive outlook on THB bonds. 

Standard Chartered recommends receiving THB 1Y, 2Y forward swap at 2.15% with a target of 1.50% and stop-loss of 2.45%, for the following reasons: 

• (1) both the policy statement and minutes of the April Monetary Policy Committee were dovish and emphasised maintaining "sufficiently accommodative" monetary conditions. Analysts do not see risk of policy tightening this year, which makes roll-down trades attractive. 
  
  
• (2) Q1 GDP grew by only 0.3% q/q on increased government spending and tourism, while exports - the engine of growth - remained weak after two years of contraction. The National Economic and Social Development Board cut its 2015 export growth forecast to 0.2% from 3.5%. 
  
  
• (3) real policy rates at c.250bps remain restrictive; the BoT "stands ready" to act on downside risks to growth and the downtrend in inflation expectations.