BOT short-term bonds 'killing' the repo market

Nattapol said as a product, repo should be growing. But short-term bonds from the Bank of Thailand (BOT), mostly with a tenor of seven to 14 days, have undermined demand.

Association figures show the BOT issued new bonds worth Bt4.1 trillion in the first half of the year, up 117 per cent year on year and outstripping other categories of bonds in both volume and growth.

The value of all new bonds, both government and corporate, issued in the first half was Bt5.2 trillion.

In other, more mature financial markets, repo - a short-term interest-bearing loan against collateral - is one of the most common investments in market funds, along with treasury bills and commercial paper.

It can be used to alleviate credit problems as long as collateral is properly checked.

Despite the lack of positive stimulus to excite the market, growth in trading volume in Thailand's bond market reached 87 per cent in the first half. Nattapol expects growth to remain about the same in the second half.

While average daily outright trading has reached Bt70 billion, up 76 per cent year on year, the same figure would amount to only Bt6.1 billion, or a 5-per-cent decrease, if short-term bonds were factored out, Nattapol said.

Expected interest-rate hikes by the BOT are believed to be keeping demand for short-term treasury bills up, he said. This is already reflected in bonds' yield curves. Yields for one- to six-month bonds have risen 8-20 basis points, one- to five-year bonds 55-117 basis points, six- to 10-year bonds 105-118 basis points and long-term bonds of more than 10 years' duration 99-108 basis points.

Net buying in non-residential trading fell to Bt84 million last month, and Nattapol believes non-residential net bond holdings will steady out at Bt85 billion and never rise above the Bt90-billion level.