THOUGH the Cabinet has decided to extend the cost of living relief measures and maintain the prices of LPG and NGV for another six months, a higher inflation stream since the beginning of the year has made investors worry about the value of money.
The consumer price indices that have been reported by the Ministry of Commerce show a continuous rise in the overall price of goods, especially fresh food and household products. This will put higher pressure on inflation until at least next year.
It is a question of which asset type is suitable to invest in when inflation is on the rise, but the interest rate is still low. While equity or other risky assets are not reasonable to invest in during the current economic climate, short-term corporate bonds are considered a good asset for risk-averse investors who want a return higher than government bonds or commercial bank deposits.
In an unsettled economic climate, investing in ST corporate bonds seems to make sense to rational investors, as this can give worthy returns, although there will be an additional risk.
For the past six months, the baht-denominated government bond yield curve has continuously decreased. The yield at the end of June dropped to 0.27 per cent from last December's figure of 1.16 per cent, while the yields of private debentures dropped from 1.7 per cent to 0.1 per cent.
In the financial market, a decline in bond yields can be interpreted as investors preferring safer havens for their assets, to prevent loss of money. However, the declining amplitude of corporate bond yields is larger than government bond yields, so it can be implied that there is a strong demand for corporate bonds.
There is now evidence showing high demand for corporate bonds in the primary market. New issuances of debentures have been welcomed by both institutions and retail investors, more so than in the past. Meanwhile, corporate bonds with a two-year tenor and BBB+ rating offer good returns of up to 3.53-4.62 per cent, which is greater by 1.43-2.14 per cent than the returns of government bonds with the same maturity period.
Though the Bank of Thailand has signalled a hike in the policy rate within this year, the interest rate is expected to move up gradually, since global economic uncertainty and internal political turmoil are still major concerns.
Therefore, returns on corporate bonds are still more attractive than returns on bank deposits.
Nevertheless, the investor should study information about debentures before making a decision to invest, because each investment has its own risk.
This article is contributed by the Thai Bond Market Association.