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Published on November 2, 2007

The yield curve at every maturity shifted up by 5-7 basis points on Wednesday before falling back to 2-3 basis points above the previous day's curve.

BOT Assistant Governor Suchada Kirakul said the rising yield curve increased the cost of funds for both public and private entities planning to finance their projects in the bond market.

She insisted the central bank did not intervene in the bond market and its bonds so far have never distorted yields, only helped smooth liquidity in the money market.

The central bank has asked the Finance Ministry for approval of its bond ceiling for next year. That does not mean it will issue all the bonds at the current time, she said.

"We asked for permission in advance because the line-up [of the new government] might not be formed when we want to issue the bonds. It's a tool for any central bank to stabilise the market and keep the key policy interest rate within target," she said.

The bonds, worth Bt500 billion, will be issued gradually, to absorb excess liquidity in the market from government spending or the central bank's intervention in the foreign-exchange market.

Aside from the latest request of Bt500 billion, the central bank still has room to issue bonds worth Bt300 billion as its ceiling is Bt1.5 trillion but it has used up only Bt1.2 trillion.

Suchada said the central bank was likely to drain liquidity at the end of the year as usual. There would be more liquidity as foreign investors would receive their investment back from the central bank after being required to put up 30 per cent, in line with the unremunerated reserve requirement.

She insisted bond issues were about sapping liquidity and not stabilising the baht.

However, the yield curve for bonds is likely to keep fluctuating as investment goes overseas for more attractive returns, she said.

The Bank of Thailand's Bt500-billion notes are likely to push the yield curve up, said Saichon Lisawadi, assistant vice president of the Thai Bond Market Association's Research Department.

Just how long the yield curve keeps climbing will depend very much on the number of allotments and their volume and duration, taking into account the direction of interest rates. The bonds, which are issued primarily to absorb liquidity, are likely to have a maturity of more than a year.

"The market sentiment is that there is too much supply and too little demand for domestic bonds," Saichon said, adding that the Finance Ministry has already flooded the market with Bt200 billion worth of bonds.

Anoma Srisukkasem

 Ki Nan Tsui

 The Nation