INVESTING / CAPITAL-CONTROL WORRIES EASE

Bond market back to life, for now

Thai bond investors are smiling again after a period of turbulence as lower interest rates, slowing economic growth and a depressed stock exchange have combined to bring the debt market back to life.

But some analysts say the mood may not last, as the market appears to have already priced in further interest rate cuts, while the foreigners who left after the government imposed capital controls in December have not returned.

The controls, aimed at reining in the baht, prompted heavy foreign selling and yields rose by 45 to 90 basis points in December.

Many had little hope for the $112-billion market until the Bank of Thailand reduced its benchmark rate to 4.75% last month _ the first cut in three years _ to support the economy.

''The market has become really active on lower rates. Banks are also trading bonds busily,'' said Kris Na Songkhla, a fund manager at Krung Thai Asset Management, which manages $3.24 billion.

''We will increase our bond portfolios quite a lot this year as stocks are more volatile,'' he said, adding that KTAM planned to launch $1 billion worth of debt funds this month.

Bond yields fell by 49-93 basis points (bps) in January, meaning prices recouped the losses suffered after the controls were imposed.

Average daily turnover on the secondary market surged to $1 billion in January versus $492 million in 2006. But foreigners only account for 5% of trade now, down from 20% before the controls came in, dealers said.

Mutual funds have been active buyers as risk-averse Thais, who have $209 billion in deposits, look for higher returns after commercial banks followed the central bank's rate cut.

Bonds maturing in one to two years are popular. They yield about 4.6%, compared with savings rates of 1-2%.

Some analysts expect further demand because tame inflation _ an annual rate of 3.0% in January and an average of 1.5% to 2.5% officially forecast for this year _ brings the prospect of more rate cuts.

''The BoT's interest rate outlook is quite clear. This is supportive for the bond market, particularly the front end of the curve,'' said Danny Swanapruti, a fixed-income strategist at Standard Chartered Bank in Singapore.

Blaming weaker consumption and investment, the central bank trimmed its 2007 economic growth forecast by half a point to a range of 4% to 5% last week, after estimated growth in 2006 of 5.1%.

Consumer confidence, which rose briefly after the coup last September following months of political turmoil, has been eroded by the impact of floods, capital controls and the New Year's Eve bombs in Bangkok. A proposed tightening of foreign business ownership rules has added to the gloom.

Catherine Tan, head of Asia Emerging Markets at Forecast Pte in Singapore, said that bond yields are unlikely to drop any lower. ''It's bullish now, but I don't see it lasting beyond mid-2007,'' she said.

''Investor confidence in Thailand is very weak and the BoT is still tweaking policies. No investor in their right mind will put their money in Thailand.'' REUTERS.

Bangkok Post
Friday February 02, 2007