Medium- and Long-term yields to rise

"It's possible that the yield will increase because the government has to boost the economy with massive spending, which will lead to inflation in the future," TBMA president Nattapol Chavalitcheevin said.

The government's plan to issue bonds to finance the budget deficit would fuel yields. Bonds worth Bt346 billion would be primarily issued in the current fiscal year.

The yield curve would face additional pressure from expectations that the Social Security Fund would unload the bonds in its portfolio to help the unemployed. It has resources to serve only a little more than million laidoff workers.

The shortterm bond yield would sink faintly in accordance with cuts in the policy interest rate. The Bank of Thailand does not have much more room for further easing of the key rate without falling into the liquidity trap. It is unlikely the rate would go below 1 per cent this year.

Rising longterm yields and falling shortterm yields would make the yield curve steeper.

The gap between twoyear and 10year yields is currently 250 basis points, the biggest in three years. It was only 50 basis points at the end of last year, said Ariya Tiranaprakij, executive vice president of the TBMA.

The shortterm bond yield has dropped after the central bank took bold moves on its benchmark rate, she said. The longterm yield has floated up because investors have unloaded longterm bonds for fear of government bonds flooding the market.

"The market has been worried that the supply would swell so investors have sold out longterm bonds to reduce volatility from interest rate risk," she said.

Nattapol projects new issues of corporate bonds reaching Bt24 billionBt25 billion this year, up from the previous forecast of Bt23 billion.

In the first quarter, the issuance of longterm corporate bonds was Bt73.5 billion, jumping 655 per cent from the same quarter of last year.

Corporations would bring forward their financing plans to the first half of the year out of concern that liquidity would dry up as a result of the government's plan to boost the economy.

Bank of Thailand Governor Tarisa Watanagase said the financial system still had excess liquidity even though the government plans to borrow in the domestic market to finance the budget deficit. The government's debt issues would not cause a crowdingout of the market.

Although the longterm yield has risen, it remains low enough to support economic growth, she said.

Government bond issuance totalled Bt86 billion in the first quarter, a 141percent hike from a year ago.

PTT Exploration and Production plans to offer Bt30 billion of bonds in May, while Siam City Bank looks to sell Bt80 billion of bills of exchange.

The corporate bond spread could decline if the panic eased. The spread has jumped tremendously since the end of last year, particularly for mediumgrade bonds.

The spread for AAArated corporate bonds has widened by 50 basis points while BBB bonds have increased 200300 basis points.

Investors should make gradual buys in the bonds, he suggested.