During the first 11 months of 2008, the turnover of debt instruments in the secondary market was valued at THB16,007,141.05 million, increasing over the THB9,743,043.72 million YoY. This was the result of higher trading volumes in three debt instrument categories, i.e., government bonds (up 2.09 percent), state enterprise bonds (up 31.00 percent) and government agency bonds (up 84.05 percent). Despite the pressure from interest rate hikes at two MPC meeting on July 16 and August 27, 2008, the factors that helped boost the growth of the debt instrument market the most were both domestic and international factors. The external factors were the global recession and subsiding inflationary pressure amid falling oil prices, while the domestic factors were political instability and an unexpected MPC rate reduction by 1.00 percent.
The direction of bond yields between January and June 2008 showed steady increase due to dramatically accelerating inflation and a forecast that the Bank of Thailand would increase their policy rate to handle inflationary pressure, which resulted in rising bond yields in concert with market forecasts. However, after July 2008, bond yields began to fall gradually due to steadily easing inflationary pressure, but amid increasing investor anxiety toward recession. Taking the margin of bond yields on the 10-year and 2-year maturities between January and August 2008 into account, it was found that the margins were rather high as the yield on almost all bond tenors increased due to inflationary pressure and an upward interest rate trend. However, since September 2008, the margin has narrowed due to the downward interest rate trend and increasing economic risks.
There are many factors likely to affect the bond market and bond yields in 2009. They include that:
§ The supply of government bonds has increased due to the government's budget deficit for FY09 with a value of THB 249.5 billion (increasing over the THB165 billion in FY08). This includes a possible mid-year budget increase by around THB100-180 billion thereby launching more bonds to cope with the higher budget deficit.
§ The volume of corporate bonds might drop due to the shrinking economy and falling private investment.
§ The demand for investment on the bond market is expected to grow continuously through to the beginning of 2009 because of volatility in money and capital markets worldwide, and the fact that the bond yields are higher than fixed deposit rates of the same maturities (especially short-term). It is also expected that there may be some decline in 1H09 as a result of the falling BOT policy rate trend to cope with recession. However, the fall in interest rates will eventually slow, and the increased supply of government bonds might adversely affect the bond market overall.
The bond yield curve trend in 1H09 will likely be flat in continuation from the end of 2008 because of higher risks and it is likely that the policy rate will decrease further. In addition, it seems that if global economies (particularly the U.S. economy) begin to signal recovery, the slope of yield curve will rise, and become apparent in 2H09.
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