Bonds the preferred investment in low-yield environment
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The global economy is expected to post negative growth this year and the world's economic downturn has adversely affected Thailand's export sector.
Thailand's exports dropped 3.5 per cent in June from a year earlier after a 5.1 per cent decline the previous month, due to weakening demand worldwide.
The central bank projected that Thailand’s GDP growth will moderate to the range of 4.2-5.1 per cent. The revised gross domestic growth is in line with the National Economic and Social Development Board (NESDB) report that the GDP grew 2.8 per cent with the same quarter last year.
When compared to the previous quarter, the seasonally-adjusted GDP in 2Q13 decreased by 0.3 per cent on a quarter by quarter basis.
As a result, the NESDB also cut its growth forecast for 2013 to 3.8-4.3 per cent.But the signs of China and emerging market slowdowns have started to affect the Thai economy which in the second quarter of 2013 grew less than estimated.
This was a result of slowdowns from moderating private consumption and investment, together with exports that have remained weak, while domestic demand is also weakening, and the infrastructure spending plan has been delayed.
Thai bond markets face several challenges, both from inside and outside factors. There are concerns the Fed could wind down its massive bond-buying programme (QE) at its next meeting in September – unless the US economic data causes a downward revision to their outlined forecasts.
If the Fed executes its policy change along the guidelines indicated, emerging markets are likely to continue to suffer, leading to an increased sell-off of Thai bonds and stock by foreign investors.In the Thai financial market, foreign investors continued to net sell Bt43 billion in the bond market (Bt32 billion in short-term bonds and Bt11 billion in long-term bonds).
At the end of August, foreign investor bond holdings stood at Bt698.8 billion, accounting for 7.81 per cent of the total bond market’s outstanding value, decreasing from Bt 710.5 billion in previous months.
The decision to keep the policy rate unchanged led to the Thai bond yield steepening, partly attributable to a decreased demand for long-term bonds.
Investors sought to reduce long-term interest rate risk exposure, as can be seen from yields of government bonds with more than one year maturity rising in the range of 15-40 basis points as bond prices fell.
Corporate credit spreads widened, indicating continued market concern over credit risk.
At the end of August, foreign investor bond holdings stood at Bt 698.8 billion or accounting for 7.81 per cent of total bond market outstanding value, decreasing from Bt 790.9 billion in the previous month.
However, as the return on government bonds remains low and stock market sentiment is sluggish, trading in corporate bonds is expected to pick up as its offers more interesting alternatives for investors seeking to enhance returns in this low-interest environment.
Because stock market returns are usually more volatile than bond market returns, when the stock market is down, the performance of bond investments can sometimes help compensate for any losses. Although the returns on bonds may be lower compared to investments in common stocks, they are still at a level better than other investments with lower risk, such as deposits.
Porpit Yodsang is Assistant Manager of Research & Development Department.
Thai Bond Market Associations . She can be reached at www.thaibma.or.th
[email protected], 02-252-3336 Ext 213
