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Published on April 2, 2008

Bank of Thailand (BOT) bonds accounted for 83 per cent of total trading value, while government bonds took only 9.1 per cent.

With the market disappointed by the prospect that the BOT would not cut its interest rate at its meeting next Wednesday, the yield curve grew steeper last month, with a spread between two- and 10-year bonds of 122 basis points.

The BOT still shows signs of worry about inflationary pressure: headline Consumer Prise Index (CPI) rose 5.4 per cent, while the core CPI inched up 1.5 per cent. Thus, the BOT will likely keep its policy rate (RP 1 day) unchanged instead of cutting the rate to be in line with the US Fed Fund rate and RP 1 day. (Now the spread is 1 per cent).

Short-term (less than 3 years) bond yields dropped 1-6 basis points, while medium-term (three to 10 years) bonds shifted up 10-20 basis points and long-term (more than 10 years) bonds moved up 15-20 basis points. Notably, the benchmark bond yield, LB133A, rose to 3.77 per cent, from 3.6 per cent, while the LB183B was last at 4.59 per cent, up from 4.4 per cent since the beginning of last month.

Since the 30-per-cent capital controls were brought to an end on March 3, the yield curve has dramatically dropped in all terms. The five-year benchmark bond yield, LB133A, has fallen more than 40 basis points, while the 10-year benchmark bond yield, LB183B, has declined about 30 basis points.

However, in the late afternoon of the same day, the Commerce Ministry revealed the CPI was higher than expected in February. The headline CPI rose 5.4 per cent (consensus 5.1 per cent) and core CPI (excluding oil and food prices) escalated 1.5 per cent (consensus 1.4 per cent), encouraging a number of investors to sell bonds to gain a profit.

As a result, five- and 10-year bond yields rose in a limited scale, about 3-5 basis points.

On March 14, the US Federal Reserve announced several emergency liquidity measures to alleviate the US financial-credit crisis. For example, it cut the discount rate (the rate the Fed directly charges financial institutions for short-term borrowing) 25 basis points before the Federal Open Market Committee meeting and allowed non-commercial banking institutions to borrow short-term funds via its discount window. Typically, the Fed has opened this window only for commercial banks under the Fed's regulation since the Fed was established in 1913. The unprecedented move obviously reflects major worries about the US economy from the Fed's point of view. It also extended the maximum period of borrowing from 30 days to 90.

On March 18, the Fed decided to cut its target Fed Funds rate and discount rate again by 75 basis points to 2.25 per cent and 2.5 per cent, respectively. (A target rate of 2.25 per cent is the lowest level since February 2005, although the 75-basis-point cut is less than a market expectation of 100 basis points. So far this year, the Fed has already cut its target rate 2 per cent.)

For the Thai economy, inflationary concerns are the highest priority for the BOT these days, because it has continuously sent a signal that inflationary pressures remained a key issue for the central bank to keep under control. From current economic conditions, the market believes the BOT will likely keep its target rate unchanged at 3.25 per cent, to tackle inflationary pressures.

The Nation