Thailand's swap yield curve flattened to its lowest level in five months on Friday after the central bank struck a hawkish note at a review this week triggering speculation it would raise rates soon.
Those concerns were tempered by an uncertain political outlook before mass rallies by anti-government protesters this weekend which, if they intensify, may hurt domestic demand and stay the central bank's hand.
A spreading economic recovery and rising price pressures have prompted Asian central banks to start withdrawing some of the emergency measures put in place during the financial crisis with Malaysia joining Australia by raising rates last week.
And expectations of further tightening have pushed up short-dated swaps with the far-end largely contained. "I think flatteners are being put on in the region on expectations of normalising monetary policy but the extent of that may be curbed in Thailand due to the political uncertainty," said Edward Lee Wee Kok, regional head of rates strategy at Standard Chartered Bank.
Both Thailand and Philippines said they will seek to "normalise" policy once signs of reccovery become more entrenched Manila reduced the cash available for short-term loans to banks at a review this week. Spreads between five-year IRS rates and one-year rates narrowed to 180 pips, the lowest since early October. On Friday though, bond markets were quiet with just a few deals struck. Prices were slightly firmer following higher US Treasury prices with some bank trading desks thinly staffed before the protests, dealers said.
Five-year bond yields eased one basis point to 3.51 percent but bid-ask spreads were wide, they said. The political crisis has dented consumer confidence which declined in February after rising for three straight months and analysts said if the crisis dragged on it would weaken the baht and push bond yields up.
"We believe this event, if it passes peacefully, should not derail the ongoing economic recovery, and may be just a step backward before leaping forward into a stronger Thailand both along the democratic and economic sides," CIMB said in a note.