Conditions stabilise as bond market adjusts

Conditions stabilise as bond market adjusts.

WICHIT CHANTANUSORNSIRI & DARANA CHUDASRI

Bond market conditions have stabilised, with new government issues continuing to be priced below coupon rates, according to Pongpanu Svetarunvra, the director-general of the Public Debt Management Office. He noted that a 6.5-billion-baht auction of seven-year bonds on Wednesday was five times oversubscribed, despite fears that market demand would lag due to the impact of the Bank of Thailand's Dec 18 capital controls.

The controls require foreign investors to set aside a 30% interest-free deposit with the central bank for inflows into the bond market.

Bond yields spiked immediately after the measure was announced, as analysts expressed fears that closing off the bond market to foreign investors would push yields upward due to lower investment demand.

But Mr Pongpanu noted that at this week's auction, the seven-year government bond was bid at 4.95%, well below the coupon of 5.25%, while a 1.5-billion-baht, 12-year bond was sold at 5.27% compared with a coupon rate of 5.625%.

''The fact that the central bank is still able to pitch new issues at a premium shows that government bonds are still seen as an attractive savings investment,'' he said.

''Foreign investors also have not transferred significant funds out of the market since the 30% rule was imposed, and many continue to park their funds in risk-free bonds.''

Mr Pongpanu added that intervention by the central bank through open-market operations had also helped push yields downward.

The Wednesday bond issue was the first lot of government bonds sold this year to offset the fiscal budget deficit, projected at 146 billion baht.

Piti Tantakasem, head of capital markets at Kasikornbank, said the yield curve had risen by 30 basis points since the beginning of the year, nearly regaining all losses from the last two weeks of December following the Dec 18 announcement of the capital controls.

''The bond market was quite volatile over the past several weeks due to interest-rate uncertainties and the 30% reserve rule,'' he said.

''But now, interest rates clearly look to be moving downwards, which has helped boost sentiment in the bond market,'' he added.

But other analysts said the bond market would continue to suffer from the Dec 18 controls, and that yields were somewhat distorted by the fact that new supply in the market was low.

Private companies have also stalled new issue plans due to the capital controls as well as expectations of falling interest rates over the next several months.

The PDMO, which oversees the government's debt financing programmes, had earlier this month floated plans to scale back its bond issues in favour of alternative financing options in light of the impact the capital controls would have.

Authorities are considering increasing their direct borrowings from local financial institutions as well as the issue of public savings bonds in order to help meet the government's financing needs.

Falling interest rates and new corporate bond issues should help boost the bond market over the next several months, said Boontuck Wungcharoen, an executive vice-president at Kasikornbank.

He said many large companies were looking at the domestic bond market as a funding option as international markets remained closed due to the central bank's currency controls.

Kasikornbank currently maintains an economic growth forecast of 4% to 4.5% this year, with corporate loan growth projected at 15%.

Mr Boontuck said negative market sentiment regarding economic and political trends was expected to be short-lived, and that investment should soon pick up as capacity utilisation was running at a high 75%.

Interest rates are also on the downward trend and should fall by 0.5 to one percentage points this year.

The markets are projecting a quarter-point cut in rates at next Wednesday's meeting of the central bank's Monetary Policy Committee.

Bangkok Post
Friday January 12, 2007