How cut in policy rate affected Thai bond market in May

Also, Thailand’s exports were still subject to downside risks from growth moderation in regional economies and the global recession, which appeared unlikely to recover quickly.

Since the latest interest-rate cut, investors in Thai financial markets have forecast that the central bank will retain its policy rate at 2.50 per cent through the end of the year.  

The rate cut reduced the volatile movement of the baht in May compared with the previous month. Also, foreign capital inflows began to slow down, leading to depreciation of the baht to a suitable level to drive export efficiency.

Yields headed upwards for Thai bonds with more than five-year maturity, because of two main factors. First, the upward shift was in line with the movement in US Treasury yields, which were affected by investors’ fears about the US Federal Reserve reducing its monthly asset-purchase programme. The second reason was the worries about potential regulatory measures on the baht, as well as uncertainty about monetary policy to manage the capital flows, especially in the bond market. 

These concerns led foreign investors to sell bonds, and yields shifted up eventually.

As a result, May was the first time in 21 months that foreign investors had turned into net sellers of Thai bonds worth Bt32.7 billion. They had been net buyers Bt366 billion in bonds since the beginning of this year. Yields of bonds with more than five-year maturity shifted up in the range of 8-20 basis points. Meanwhile, the cut in the policy rate caused the yields of bonds with less than three years’ maturity decrease in the range of 5-13 basis points.

Turnover in the secondary bond market reached Bt2.16 trillion, or a daily aver?age of Bt107.86 billion, increasing 6 per cent from the previous month (daily average Bt107.85 billion in April). However, more than 62 per cent of daily trading value, or Bt54.41 billion, was concentrated in short-term bonds with less than one year’s maturity.   

The major investors in the Thai bond market were still asset-management companies, which accounted for 56 per cent of total trading value, while foreign investors captured 23 per cent, or Bt298.69 billion.

At the end of May, foreign investors’ bond holdings stood at Bt816.48 billion, accounting for 9.3 per cent of the overall bond market’s outstanding value and well above the Bt710.5 billion recorded at the end of last year. 

This month, there are many factors that investors in both the stock and the bond markets need to be concerned about, such as the Fed’s decision on its quantitative-easing programme as the US economy showed signs of recovery and the QE programme in Japan.   

Furthermore, global economic prospects and the decisions of central banks in the region on their own policy rates may affect the investment environment, and investors will have to follow up continuously.

 

Porpit Yodsang is Assistant Manager, Research & Development Department, Thai Bond Market Association