Bond market overview of 2014 and outlook for 2015

The bond market continues to grow gradually, according to the latest figures. Last year, outstanding bonds increased 3.3 per cent to Bt9.29 trillion, of which Bt3.5 trillion or 38 per cent was government bonds, followed by Bank of Thailand bonds with Bt2.7 trillion or 30 per cent and corporate bonds at Bt2.2 trillion or 24 per cent.

Issuance of corporate bonds hit an unprecedented high. Despite the sluggish growth of the economy, corporations chose funding via long-term bonds. Last year saw bonds worth Bt553.94 billion issued, breaking the old record of Bt509 billion in 2013.

There were 24 newcomers, bringing the total of corporate issuers to 88, also a new record. The figures show that corporations started to pay more attention to diversifying funding channels and restructuring their cost of funds while interest rates remained low.

Turnover dropped slightly by 9.7 per cent to Bt77 billion due to the decline in Bank of Thailand bond trading after the central bank scaled back its bond issuance.

Corporate bond trading was tepid at Bt2.4 billion per day on average.

The bond market lost Bt26.2 billion in outflows but there were inflows in long-term bonds of Bt68 billion. Regarding political uncertainties in Thailand and concern over the Fed’s tapering of the US asset-purchasing programme, known as QE, only Bt69.9 billion of foreign funds flowed out of the Thai bond market in the first five months of 2014. However, after an economic roadmap was drawn up by the National Council for Peace and Order in late 2014, a large amount of foreign capital flowed back into the bond market, especially in long-term bonds, which received a net inflow of Bt109 billion from June-December.

Nevertheless, when taking into account the 2014 capital flow details, it can be seen that foreigners held bonds valued at Bt683.22 billion, which is 3.7 per cent lower than Bt707.90 billion at the end of 2013. The net outflow was Bt26.2 billion, mainly from short-term bonds of less than one-year maturity. In fact, if only long-term bonds older than one year are considered, the inflow was Bt68.3 billion, which reflects the confidence in long-term investment of foreign investors.

Bond yields shifted down along the whole curve last year. The short-term bond yield fell about 25 basis points along with the cut of the policy rate from 2.25 per cent to 2.0 per cent in March.

The long-term bond yield shrank 60-110 basis points, as the economic recoveries here and abroad were below the market’s expectation. The yield spreads of two- and 10-year Thai bonds were still the same or higher than those in many Asean countries, such as Malaysia and Indonesia. From the foreign investor perspective, the Thai bond market is still attractive. This will affect the long-term bond yield in the future.

This year, the bond market is expected to keep growing due mainly to two trends.

Because of the slow recovery of the world economy and signs of deflation, many central banks will have to maintain interest rates at a low level and also inject money into the system, so there is a chance that foreign funds will flow into the Thai bond market.

Thai interest rates may start heading down. The Fiscal Policy Office has revised the GDP growth rate to 0.8 per cent to reflect the slow recovery of exports and high level of household debt.

This might call for a reduction of the policy rate. Then the bond market would attract investors and corporations would continue funding via the market.

As the policy rate is brought down, bond prices may shift upward along with the constantly low interest rate. These factors may have some effect on the investment environment, and investors will have to follow up continuously.

Kantiros Rangkasikorn, analyst |officer in the Research and Development Department of the Thai Bond Market Associations, can be reached at [email protected].