Govt urged to issue bonds less often

The Finance Ministry schedules 20-30 issues a year but all are small and most are savings bonds, which rarely change hands. Banks scoop up the rest to plump up their capital reserves, hoarding about Bt200 billion of government bonds.

"With fewer series, each issue would be bigger to attract large investors," he said. "In fact, we really don't need benchmarks for all maturities. The benchmarks for bonds of three to five and 10 years are sufficient," he said.

As bonds are most liquid during auction periods, the ministry should set a fixed issuance timetable, preferably in the middle and end of each year, he said. Taiwan issues bonds of only three maturities twice a year, while some countries open a monthly auction with a single maturity each.

"Without benchmarks on the run, it's difficult to boost bond market liquidity," he said.

Issuing 30-year bonds seems impractical, given that investors are small. While insurance companies and the Social Security Fund may be attracted to long-term bonds, as they do not need to mark their investments to market, investors in general who fall under the mark-to-market rule resort to short-term issues to minimise risks, as hedging tools are still limited.

During a workshop two decades ago in New York, he learned about many new financing products. But none of them have made it here. Many kinds of bonds could not be developed here, as there is no taxation system for them.

For safety, issuers also look to the simplest and cheapest instruments, like those with fixed rates, leaving behind derivatives like bond futures or interest rate swaps.

"A lack of hedging instruments discourages potential investors from jumping into the market," he said. "We have attracted institutional investors but not retail, who account for only 5 per cent of overall transactions."

Investors are exposed only to fixed and floating-rate bonds, and some asset-backed bonds. Zero-coupon bonds, which give investors a steep discount from face value rather than interest, have been popular in the US for over a decade but have not been tried here yet.

Although the local mutual fund industry is growing, the funds are focusing on plain and low-risk securities like treasury bonds and highly rated debentures. In the absence of individual and corporate investors, as well as market makers to bridge transactions, the secondary market has been rather quiet.

"From over 600 registered bond issues, there are less than 10 transactions each day. On average, an issue is transacted every 20 or more days. Some are traded only once, on the issuance date," Nattapol said.

Drastic reforms are called for, or the bond market will stay small and most bonds will remain in the hands of institutional investors, he said. As a result, turnover in the secondary market will remain low.

nThe first part of this two-part article was published on May 26.