Bond market sees mixed response from the state-of-emergency declaration

This was later accentuated by Standard & Poor's warning on the country's sovereign creditrating outlook, with some local players saying a creditrating downgrade could prompt foreigners to reduce their bond holdings in Thailand.

However, foreign investors seem to be holding a different view, since a creditrating downgrade could potentially dampen investor sentiment overall, which actually bodes well for the local fixedincome market.

Furthermore, foreign investors' concerns over baht depreciation can easily be addressed by hedging their foreignexchange exposure. By the end of the session, local bond sentiment turned around to end slightly bullish on the day, while some foreigners were also noted buying.

Meanwhile, Thailand's 5Y Credit Default Swap (CDS) spread has risen 40 basis points since the start of July to 145 basis points now, clearly reflecting heightened credit concerns.

However, we see the iTraxx Asia exJapan Credit Index also widened 30 basis points to 160 basis points in the same period. Thus, Thailand's 5Y CDS has only marginally underperformed its peer index despite the ongoing political turmoil.

Going forward, bondmarket players will obviously keep a close watch on political developments, although we expect the focus to shift back to fundamentals; namely, the central bank's policy outlook and supply.

On the latter, the Public Debt Management Office (PDMO) has indicated it tentatively plans to raise Bt424 billion in fiscal 2009 ending this September 30, where Bt249 billion is earmarked for budgetdeficit funding and the rest for financing rollovers, including savings bonds.

Of that Bt424 billion, Bt268 billion is expected to be raised from government bonds (loan bonds), Bt60 billion from savings bonds, Bt55 billion from treasury bills by increasing the outstanding balance and Bt41 billion from other sources.

In conclusion, the tentative issue quantum for fiscal 2009's loanbond supply is lower than initial market expectations, since the PDMO plans to diversify its funding sources, as opposed to concentrating only on financing loan bonds.

We believe the Thai bond market can rally slightly further, although with the front end of the curve already relatively flat, we see more scope for the belly and longer tenors to rally.

The risk is if the situation deteriorates to a level where the Bank of Thailand may have to cut rates sooner than expected, then this could prompt an extended rally across the yield curve.

However, the bond market should turn slightly bearish next quarter, since the tentative supply schedule of Bt60 billion is almost double this quarter's Bt33 billion, even though the annual amount for the fiscal year is smaller than expected.

Danny Suwanapruti is a fixedincome strategist for Standard Chartered Bank based in Singapore.