Asian inflation-linked bonds come of age amid strong demand for Thailand’s second issue


Kanika Saigal
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Strong foreign demand powered Thailand’s second inflation-linked bond, highlighting expectations of price pressures in developing Asia and the shortage of investable inflation-hedging products.

Thailand sold a 15-year 40 billion baht ($1.3 billion) inflation-linked bond (ILB) with a competitive 1.25% coupon on Tuesday. The strong international bid – accounting for two-thirds of the order book – underscores pent-up demand for exposure to Asian inflation-linked products amid a shortage of supply and the expectation of structurally high inflation in the developing markets of Asia. Analysts say Thailand’s success is likely to ignite further supply of inflation-linked debt from the region, including potential debut issuer the Philippines. The issue saw the return of some of the largest global investment funds, which exited the country in 2006 amid political turmoil after the military coup and subsequent capital controls issued by the Bank of Thailand. The biggest investors came from the US and Singapore, with investors from 11 countries making up the total book. “The return of these large global funds highlights how investor confidence has returned to Thailand, and that they see we have price stability here,” Chularat Suteethorn, the director general of the government’s public debt management office at the ministry of finance, tells Euromoney. “Moreover, the tenor of the debt shows that investors are here for the long term – this is not just hot money coming into the country.” The 15-year ILB was three-times oversubscribed and is the second debt of its kind to be issued by Thailand. The first was in 2011 – and emerging Asia’s first issue of this kind – for Bt30 billion and with a shorter tenor of 10 years. Two-thirds of the book was taken up by domestic investors. The longer tenor offered on Tuesday was issued after the outstanding debt for the initial ILB was raised to Bt100 billion. “International investors were much more aggressive this time around,” says Suteethorn. “This, combined with the overwhelming demand we saw for the issue, meant that we could price the bond at the lower end of the guide price at 1.25%.” HSBC, Deutsche Bank, Bangkok Bank and TMB Bank were the lead managers on the deal. Inflation-linked bonds provide investors with a hedge against price instability by linking principal and interest payments to an official inflation index. The Asian Development Bank forecasts 4.2% inflation in emerging Asia in 2013. Thailand has started issuing a variety of bonds to develop the capital markets, says Suteethorn. “Some of our investors have requested more innovation of the Thai bond market, so we started looking at new types of products and have reacted to this,” she says. “Through this, we have not only expanded the Thai capital markets through diversification, but we have expanded our investor base.” South Korea, Hong Kong and Japan are the only other countries in the region to have issued similar bonds, but the Philippines might be next in line to issue inflation-linked debt, says Suteethorn. “A Philippines representative is scheduled to come and visit us at some point this month to learn a bit more about the bond and perhaps look to doing something similar in the future,” she says. “Thailand will be a leader in the development of the debt capital markets within the Association of Southeast Asian Nations.” Of course, foreign demand for local currency emerging market debt in a funky inflation-linked format also highlights the return of risk appetite in 2013 and the pent-up demand for alternative EM sovereign debt products.