Economy July 03, 2014 00:00


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Changed scene sees return of foreign funds to bond market

FOREIGN FUNDS have flowed back into the Thai bond market after prospects for the political situation turned brighter.

There has been much progress regarding the work of an advisory board set up by the National Council for Peace and Order (NCPO), such as the fast disbursement of money owed to farmers in the rice-pledging scheme, the speed-up of government expenditure, acceleration of approval for Board of Investment privileges and the approval of a government budget for fiscal year 2015.

Also, the latest Consumer Confidence Index (May) rose for the first time in 14 months and was the highest in four months.

All of these are favourable factors leading to the flow of foreign capital back into the Thai stock and bond markets during the past month.

Meanwhile, the Bank of Thailand has left its policy interest rate unchanged at 2 per cent because of the 2.62-per-cent May headline inflation rate and 1.75-per-cent core inflation, a 17-month high. The BOT has also lowered its growth projection for this year’s gross domestic product to 1.5 per cent from 2.7 per cent in response to the weak economic performance in the first quarter. However, these decisions haven’t had an impact on the Thai bond market, which has been performing in line with expectations.

Regarding the unchanged policy rate, yields of short-term government bonds (less than one-year maturity) rose slightly in the range of 1-2 basis points. Meanwhile, the slope of long-term government bonds (starting from one-year maturity) is getting steeper, partly attributed to the increasing US Treasury yield curve. Yield of Thai long-term government bonds rose in the range of 4-10 basis points.

Focusing on non-resident investors, the situation in June turned more positive when the NCPO’s political road map led to the reviving of the economy that shrank in the first quarter. Non-resident investors seemed to have more confidence and became net buyers of Bt64.5 billion in the Thai bond market (Bt58.1 billion in short-term and Bt6.4 billion in long-term bonds), while around Bt33.7 billion of short-term bonds held by non-residents expired in June. So a total of Bt30.8 billion foreign capital flowed into the Thai bond market last month. At the end of June, non-resident bond holdings stood at Bt670.3 billion, accounting for 7.23 per cent of total outstanding value, which decreased from Bt707.9 billion at the end of 2013.

However, the Public Debt Management Office has just released a schedule that shows only Bt126 billion in government bonds will open for auction in the fourth quarter of fiscal 2014 (July to September), somewhat less than usual. Hence only Bt447 billion of government bonds will be auctioned this quarter compared with Bt600 billion estimated early this fiscal. In this way, it is possible that yields of government bonds from now on will decrease (price increase) because of the lack of supply, while there will be a lot of new demand from both local and non-resident investors.

As a consequence, it is now an interesting period to invest in the bond market. As the return on government bonds remains low and stock-market sentiment is sluggish, trading in corporate bonds is expected to pick up as its offers more interesting alternatives for investors seeking to enhance returns in this low-interest environment. Especially when the stock market is down, the performance of bond investments can sometimes help compensate for any losses. Although the returns on bonds may be lower compared with investments in common stocks, they are still at a level better than other investments with lower risk, such as deposits.

Porpit Yodsang of the research and market development department, Thai Bond Market Association, |contributed this article.