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20 Nov 2009

Financial Markets

Bond Market, 2010: Less Vibrant Than 2009 (Current Issue No.2186)

KASIKORN RESEARCH CENTER (KResearch) views that the bond market in 2010 will likely be less active than this year, one of the best years for Thai bond market, so far, due to the recovery trends in economies at home and internationally, plus optimism toward inflation and upward interest rate trends that will induce investors to reduce safe-haven, low-risk assets and return to higher risk assets.
In addition, continuity in economic stimuli of the “Thai Kem Kaeng” investment program and a recovery in private sector investment are expected to affect liquidity in the system and spur a return in investments, including higher bond yields, than in 2009. Furthermore, the BOT’s confidence toward the economic recovery will contribute to tightened monetary policy where they may raise their key policy rate, which would finally lead to broad increases in interest rates in the financial system.
A higher bond yields trend would inevitably increase the private sector’s cost of debenture issuances. Those who want to mobilize capital may have to offer higher returns to attract buyers over other saving products (although the business sector will have many more alternatives in mobilizing capital next year than in 2009). However, investors’ higher risk appetites in 2010 will help enhance opportunities for bond offerings by companies possessing lower credit ratings (but still at investment grade levels).
In light of an upward trend in bond yields, bond investors should concentrate more on holding shorter-term debt instruments in order to relieve possible impacts from mark-to-market accounting effects, or wait for the right time to invest in bonds to receive higher returns (especially with ‘Hold to Maturity’ investment strategies). For investors with lower-risk appetites, such as senior citizen investors, government savings bonds seem more preferable for them.
Initially, the Ministry of Finance has planned to issue THB170 billion in savings bonds in FY2010 to finance government budgetary deficits and the “Thai Kem Kaeng” investment program.
Of this THB170 billion, the government will begin to issue new savings bonds valued at THB60 billion in early 2010. Nevertheless, precise size and timing of such bond issuance will largely depend on progress in the “Thai Kem Kaeng” investment program and government income tax collections. Also, the probability that the BOT will issue these saving bonds will largely depend on their liquidity management policy (relied on the current account status, capital movements and the Baht trend) as well as their monetary policy directions.

The above estimate is mainly based on main assumptions of an expected gradual recovery in the Thai economy and an upward direction in inflationary pressure, which may lead to an increase in the BOT key policy rate, in line with the majority of central banks worldwide. However, the economic recovery may not improve as expected if certain risks appear ahead, such as domestic political uncertainties, unclear investment projects, international conflicts and epidemic outbreaks that may affect investors’ asset allocation behavior, thus possibly weighing the overall Thai bond market situation to differ from our estimate.

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