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Bond markets price in possible cut in policy rate

Some recent economic indicators showed that the Thai economy was continuing to slow on both the expenditure and production sides, especially domestic demand, which has been affected by political unrest.

The National Economic and Social Development Board reported that gross domestic product in the final quarter of 2013 rose by 0.6 per cent from a year earlier, and heightened political tensions during the quarter resulted in a clear deterioration in domestic activity, particularly within the business sector.

While GDP expanded 2.9 per cent last year, much lower than the 6.5 per cent in 2012, one of the main reasons was decelerated government and private spending. This year, exports might not benefit fully from the prospective global economic recovery. Fitch Ratings feels that much further prolongation of the political stand-off could have a lasting negative impact on Thailand's economic performance and financial stability.

Consequently, with all of the factors indicated above, markets are fully pricing in expectations that the Bank of Thailand might cut its policy rate this month. As a result, yields of short-term government bonds (less than one-year maturity) decreased slightly, in the range of 1-2 basis points, while yields of long-term government bonds (longer than one-year maturity) shifted down in the range of 2-16 basis points. There was continued buying by domestic institutional investors, especially of medium-term bonds, because prices of bonds in this tenor had already dropped sharply in the previous period.

Last month, total trading value was Bt1.38 trillion or Bt72.8 billion per day, increasing 3 per cent from January's Bt70.94 billion per day. More than 68 per cent of daily trading value was in less-than-one-year bonds. The major investors in the Thai bond market were still asset-management companies, which participated in 62 per cent of total trading value, while non-resident investors captured 12 per cent.

Growing political unrest in Thailand has begun affecting foreign investors' confidence, which can be seen in the considerable non-resident net selling of long-term bonds during February. They were net sellers of Bt1.5 billion last month, buying Bt1.7 billion in short-term bonds and selling Bt3.2 billion in long-term bonds. Furthermore, there was another Bt5.0 billion of expired bonds held by non-residents during the period. So there was Bt6.5 billion of capital outflow from the Thai bond market, similar to the stock market, where non-resident investors were net sellers of more than Bt21.38 billion in the same period.

At the end of February, non-residents' bond holding stood at Bt683.1 billion, accounting for 7.54 per cent of the total bond market's outstanding value, a decrease from Bt709.4 billion at the end of December.

This month, there will be many interesting factors that investors in both the stock market and the bond market need to be concerned about, including the political situation and the slowdown in the Thai economy. All of these factors may have some effect on the investment environment, and investors will have to follow up continuously.

Porpit Yodsang of the Thai Bond Market Association can be reached at porpit@thaibma.or.th or 02-252-3336 Ext 213.


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