Bond Outlook

However, dollar and baht liquidity improved onshore from midOctober onwards, which saw forex swap points move to the right, THBFIX fixings propel back north and bond/swap spreads normalising to around plus 3040bps.

Going forward, monetarypolicy easing by the central bank is almost certain, although the magnitude of cuts in store remains ambiguous. We see scope for 75bps of policyrate cuts in this cycle to 3 per cent, with risk skewed towards deeper cuts. Onshore funds should continue to purchase local bonds, since there is a dearth of appetite for offshore investment at this juncture. Thus, domestic liquidity should remain onshore and ultimately find its way to the bond market.

Meanwhile, any foreign exodus from local bonds should be limited, since foreign holdings are relatively small.

Notably, the finance minister recently said the budget deficit may be increased by Bt100 billion this fiscal year (October 2008 to September 2009) to Bt349.5 billion in order to bolster the economy. Clearly, additional loan bond supply (potentially worth Bt100 billion) is a bearish factor for the bond market. However, given the dovish Bank of Thailand outlook, risk aversion and limited appetite for offshore investment, we feel the market should be able to absorb the additional issuance, particularly if it is spread out evenly over four quarters and across the maturity spectrum.

Thus, even with the added supply (potentially), our prognosis for the Thai bond market remains bullish.