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Published on March 11, 2008

Bank of Thailand bonds accounted for 88 per cent of outright transactions while government bonds amounted to only 7.25 per cent.

The yield curve grew steeper over the month. Short-term bonds of less than three years dropped to 1-3 basis points, while medium-term bonds up to 10 years and long-term bonds rose by 7-35bps and 30-48bps respectively.

Notably, the benchmark bond yield, LB133A, went down to 3.48 per cent from 3.62 per cent, while LB183B last executed at 4.25 per cent from 4.12 per cent. Amid rumours that the central bank would lift its 30-per-cent reserve requirement, the curve dramatically moved down at the end of the month. After the official announcement of the scrapping of capital controls in the late afternoon of February 29, the curve continued its downtrend.

On January 30, the US Federal Reserve cut its target Fed funds rate by 50bps, from 3.50 per cent to 3 per cent. It also reduced the discount rate by 50bps, from 4 per cent to 3.50 per cent. So far this year, the Fed has already cut its target rate by 1.25 percentage points.

However, the lower-than-expected gross domestic product growth of 0.6 per cent in the fourth quarter of last year, compared with the 1.2-per-cent forecast figure, may indicate the US is heading for recession in the wake of the sub-prime turmoil. Economists still expect that the Fed will continue to cut its target rate in order to fuel the US economy until the end of the year.

Nevertheless, on February 27, the central bank decided to hold its key one-day repurchase rate at 3.25 per cent.

"The Monetary Policy Committee (MPC) deemed the overall growth momentum of the Thai economy improved due to the pickup in domestic demand, partly as a result of the accommodative monetary policy in earlier periods," the MPC said in its statement.

"Headline inflation remained at a high level, but was expected to moderate going forward. At the same time, core inflation was expected to remain within the target range throughout the next eight quarters. However, risks remained that global economic growth could turn out weaker than expected, affecting the Thai economy and inflation expectations going forward.

"The situation will therefore need to be monitored closely. In the meantime, the MPC decided to keep the policy interest rate at 3.25 per cent per annum."

Overall, Asian monetary markets are confronting inflationary pressure due to the continuous US policy rate cuts, which widened the gap between the cost of capital in Asia and the US.

As a result, many foreign investors borrowed US dollars to invest in Asian assets. Most Asian central banks have implemented some measures to prevent their currencies from appreciating too rapidly. They also have to fight inflation from foreign-capital inflows by issuing a series of short-term bonds and controlling the price of consumer products.

BOND ELECTRONIC EXCHANGE contributes to bond summary

The Nation