HONG KONG: Short-dated Thai interest rate swaps dipped on Wednesday as market players took profits after a recent bout of paying that took rates to 2-1/2 year highs recently but trade is expected to be rangebound before a policy review later in the day.
While Bank of Thailand is widely expected to raise rates by a quarter point at Wednesday's review with rate markets betting on another 50 basis points of hikes to follow, traders are preferring to wait for its comments on the rate outlook before taking on fresh positions.
Two-year swaps slipped slightly to 3.22 percent after hitting a November 2008 peak of 3.31 percent earlier this month, pulling the spread between five and two year swaps to a January 2009 low of 50 bps.
Even though that rise in swaps have been fairly sharp in recent weeks, they may rise higher if Bangkok emphasizes a hawkish stance.
"The Thai rates market is already pricing in today's expected rate hike, but hawkish comments accompanying a materialization of the hike could still push up front-end IRS further," Credit Agricole strategists said in a note.
Thailand has been one of the most hawkish central banks in the region with Bangkok lifting rates by a total of 125 basis points since July last year and letting its currency rise to tame growing price pressures in Southeast Asia's second-largest economy.
As local interest rates headed higher, offshore-focused bond funds started redeeming their investments abroad and sent money home to take advantage of higher yields in local currency bonds.
That influx of funds also propped swap rates up as investors hedged their bond purchases in the swap market. Six month Thai baht fixings , the floating leg for swap contracts, are up by nearly 40 bps in the last three weeks.
Paying in swaps has rippled over into the bond market to an extent, though the spike in yields has generally been softer, as the baht's nearly 4 percent rise since the January lows has enhanced the appeal of fixed income instruments.
Two-year bond yields are up by about 15 bps in the past one month though the belly of the yield curve -- the three to seven year segment -- has seen a fair bit of buying interest this week, especially from offshore players, Bangkok-based traders said.
But forward starting swaps suggest the bulk of Bangkok's rate tightening cycle is already over with rates softening in recent sessions.
ING, for one, expects only one more rate hike after today's increase as prospects of low inflation and political considerations ahead of the June elections would stay the central bank's hand.
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