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Treasury Outlook



State enterprises have experienced an unpleasant surprise when issuing longterm bonds this year.

These agencies have had to pay spreads of up to 0.601.00 percentage point higher than the government yield curve - despite their bonds being guaranteed by the Finance Ministry.

In comparison, this spread in the fourth quarter of 2008 was around 0.2 percentage point.

Why is the spread now so high? The answers are related to the government's own poor bond auction results this month.

On February 11, the state failed to sell all of its Bt15 billion, fiveyear bond issue, with bids covering 96 per cent of the planned amount.

The outcome on February 18 was even worse. The government sold only Bt2.65 billion in 15year bonds, from a planned issue size of Bt7 billion.

The interest rate was up to 4.64 per cent - or 0.35 percentage point higher than market quotes from before the auction. That rate would have been even higher if the government had accepted all bids for the bonds.

The poor auction results show that there is limited investor appetite for longterm bonds at low interest rates. The current yield curve has been low due to limited supply, but could jump quickly if supply increases.

There is still plenty of liquidity in financial markets, but much of it is geared towards shortterm investments. The challenge is how to best match that liquidity to the government's large funding needs.

Markets will closely watch upcoming longterm government bond auctions - a 10year Bt12 billion auction on March 18 and a 20year Bt7 billion auction on March 25. Given current conditions, it may be difficult to sell the amounts planned without significantly raising yields.

Besides accepting higher yields, other possible options for the government are to increase shortterm issues, or to experiment with new loan types that may attract investors such as floatingrate bonds or Islamic debt.



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