Tuesday, October 20, 2020

No clear favourites in battle of the bonds as investors weigh options

Mar 31. 2017
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By WICHIT CHAITRONG
THE NATION

NEARLY Bt5 billion in government savings bonds will be made available to retail investors this month, but the question is whether savings bonds or corporate bonds are more attractive.

While listed companies rushed to issue corporate bonds in the first quarter and the trend is expected to continue in the second quarter, government savings bonds with no maximum will be available this month, the Finance Ministry says. 

The Public Debt Management Office (PDMO) on Thursday invited retail investors to subscribe to the bonds, worth a total of Bt4.96 billion. 

The three-year-maturity bond has a coupon rate of 2 per cent per annum, while the seven-year-maturity bond offers 2.56 per cent.

The Bt4.96-billion bond batch will be available at Bangkok Bank, Krungthai Bank, Kasikornbank and Siam Commercial Bank from April 10-21.

The minimum investment is Bt1,000.

The bond issuance is part of a Bt15-billion batch put on sale since late last year by the government as it seeks funds to finance its budget deficits. 

The Finance Ministry said the bonds were an alternative investment for savers who wanted higher returns than bank deposits. Major banks offer around 0.5-per-cent interest on savings deposits, while interest on 24-month fixed deposits is in the range 1.0-1.8 per cent per annum. 

Currently, purchases of the government bonds are capped at Bt2 million at each of the four banks, or Bt8 million in total.

Suwit Rojanavanich, director-general of the PDMO, acknowledged that many large companies had issued corporate bonds and offered higher coupon rates than government bonds, by up to 100 basis points. 

“But corporate bonds carry higher risks compared with government bonds, which are risk-free,” he noted. It is up to investors how they manage their portfolios, mixing government bonds, corporate bonds and equities. 

Market analysts are closely monitoring the US Federal Reserve’s moves, which could push the bond yield curve up, should it further increase the policy rate later this year. The Fed raised its policy rate by 0.25 percentage point in March and the market expects it to jack up the rate twice more this year. 

Interest rates may rise in the second half of the year and could affect medium- and long-term bonds with maturity of three years and up, said Ariya Tiranaprakij, executive vice president of the Thai Bond Market Association. 

She said companies had taken advantage of the low-interest-rate environment in the first quarter and issued 35 per cent more bonds than in the same quarter last year. As of March 30, total issuance was worth Bt172 billion. The issuance is expected to slow down in the second half of the year if interest rates rise.

Companies with “AAA” ratings such as Siam Cement offer about 50 basis points above government bonds, she said. 

She said investors might subscribe to bonds with maturity of no more than two years in order to manage their risks better. Retail investors might opt for mutual funds, which could manage risks better because of their diversification of debt instruments.

The government may issue another batch of savings bonds later as it still needs to seek more funds to finance large budget deficits. 

Reasonable returns on bond investment will depend on how the global market plays out given the risks of Fed moves, impacts from Britain’s departure from |the European Union, and the outcomes of elections in Germany and France. Should the Fed increase its key rate gradually as the market expects, the impact on bond yield will not be much. 

 

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