Before May 20, yields of government bonds with maturity longer than one year went down by 10-15 basis points because of the lower supply of new government bonds, particularly benchmark bonds with tenors of three, five and 10 years.
High demand from a domestic institutional investment group was one of the major factors driving the decline in yields of long-term bonds.
However, on May 20, the Army declared martial law nationwide to unplug the prolonged political unrest that has left the country without a proper functioning government.
The impact on the Thai bond market could be both negative and positive. On the positive side, investors had initially thought that martial law was the right step forward for the stability of Thai politics. Investors viewed this announcement as a means of bringing in a functional government and an effectively stimulatory fiscal policy as well as an end to the political conflict in the long term.
Anyway, some foreign investors have pulled their money out of the country because the declaration of martial law showed that the situation was out of hand, eroding investor confidence.
After May 20, yields of bonds with more than five-year maturity headed upwards because of two main factors.
First, the economic roadmap drawn up by the National Council for Peace and Order (NCPO) will speed up the implementation of the fiscal 2015 budget to meet the schedule by October. This contributes to the market’s anticipation that government bond supply will rise.
The second reason is the concern about the political violence, which may lead to the possibility of a downgrading of the country’s credit rating. These concerns led non-resident investors to sell bonds, and yields drifted up by 5-10 basis points.
As the market sees it, the Monetary Policy Committee is likely to keep the policy rate unchanged for the rest of this year after the NCPO assigned the Finance Ministry to secure Bt92 billion in funding to repay farmers, through the Bank for Agriculture and Agricultural Cooperatives, who are owed money under the rice-pledging scheme.
With the overdue rice-pledging payments, the NCPO and the Finance Ministry believe that gross domestic product will get a 0.2-per-cent boost through increased spending by farmers.
About Bt65 billion of foreign funds flowed out of the bond market last month. At the end of May, non-resident investors’ bond holdings stood at Bt639 billion, or 7.03 per cent of the total outstanding. However, these capital outflows have not caused much concern because most of them were from short-term bonds.
There has still been continuous buying by domestic investors, especially a group of institutional investors. According to an investor group trading in the bond market at present, the major investors were still asset-management companies, which accounted for 59 per cent of total trading value, while foreign investors captured 13 per cent, or Bt158 billion.
Throughout the past six months, the political unrest has seemed to sapped investors’ economic confidence and prompted foreign capital to flow out of financial markets.
No matter how this outflow affects Thailand’s financial and economic circumstances, investors need to monitor the situation closely.
Porpit Yodsang of Thai Bond Market Association can be reached at firstname.lastname@example.org or (02) 252 3336 ext114