After the rally, baht bonds still far from a bear market

Two factors can prompt a bear bond market: the new administrationÆs management of banking NPL, and planned bond issuance this quarter.

Bangkok’s earlier than expected announcement of its intention to issue seven-year baht bonds by the end of the first quarter hardly dented last week’s rally of baht government bonds.

The local bond market actually rallied strongly, with 10-year yields moving from 5.8% to 6.10%. Mostly this was due to the 50 basis point (bp) Fed cut on 31 January, as well as a downward reduction of Thailand’s 2001 GDP growth forecast to 4.5%.

The rally found supporting parameters from the favorable auction results of government bonds and Financial Institution Development Fund (FIDF) bonds. The average yield of the LB157A auction on 31 January, for example, was 5.65%, roughly 37bp lower than the 17 January auction.

The yield on long-term government baht bonds dropped up to 55bp on some tenors. The 10-year yield, for instance, has been lowered to 4.32%. The spread between the short term two-year and the long term 10-year bonds has also tightened to 150bp. This has been attributed to the fact that bond players view substantially lower risk for the Thai economy in the long run.

While last week’s rally is thought to mark a peak, a bear market for baht bonds is not expected, however. Many believe that if projected growth rates are lowered from current estimates of 4.5% for the second half of this year to 3%, the 10-year yield could drop faller as inflationary fears dampen.

A Merrill Lynch research report concludes, on the other hand, that the current low 10-year yield may already reflect a clearer picture of the political issues, the downward forecast of this year’s GDP growth, and the expected local deposit interest rate cuts.

Two factors can prompt a bear bond market, namely a new administration’s measures to manage non-performing loans (NPL) in the Thai banking sector, and surplus bond issuance.

Many believe that the new administration’s electoral promises can only be achieved by borrowing from the markets. Among the first tranche in the pipeline is Bt20 billion ($469.5 million) in seven-year bonds to be issued this quarter.

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