1. Economics /
.Mean S Capital Market Perspectives
KBank Strategy
Update on bond supply for Q3 FY2011 FX / Rates
30 March 2011
Bt103.5bn bond supply in Q3 is close to initial estimate; the
actual supply is merely Bt4bn bigger than foreseen last year Nalin Chutchotitham
nalin.c@kasikornbank.com
Key difference is the issuance of Bt30-40 of inflation-linked
bonds that remained unofficial
During our seminar for institutional investors last week, the
director of PDMO clarified that government’s financing needs had
reduced substantially from their initial estimate
We continue to expect policy rate to move up to 3.25% by July
and bond yields on the front-end could rise further, making the
Disclaimer: This report
yield curve flatter in the next quarter must be read with the
Stay with bonds along the mid-curve as long-dated bonds sees Disclaimer on page 6
that forms part of it
little value in an inflationary environment
Q3 bond supply in line with initial estimate
KBank Capital Market
The Ministry of Finance would be issuing a total of Bt103.5bn of bonds in the third
Research can now be
quarter of the fiscal year 2011. The size is close to our initial estimate ($99.5bn) which
accessed on Bloomberg:
had been derived from the PDMO’s (Public Debt Management Office) whole year plan.
KBCM <GO>
The major difference is likely to be the issuance of Bt30-40bn worth of inflation-linked
bonds that remained unofficial despite much news and excitement among the
regulators and investors. We expect that the market would continue to have high
demand for government bonds, due to the high level of liquidity among savers. Foreign
investors’ inflows into the bond market had slowed in recent months but continued to
be observable. An added risk factor to the performance of the bond market is the
increases in fixed deposit rates, which had risen rapidly due to banks’ competition and
loan expansion.
Table 1. LB auction plan for FY2011 (based on PDMO documents) unit : billion baht
Initial
tenor Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Q1 Q2 Q3 Q4 Total Budget
5Y 13 - 14 - 10 - 16 - 20 - 20 - 27 10 36 20 93 100
7Y - 12 - 10 - 10 - - 10 9 - 12 12 20 10 21 63 65
10Y - 10 - 7 - 7 - 10 - 10 - 13 10 14 10 23 57 70
12Y 8 - 8 - - - - - - - 8 - 16 0 0 8 24 40
15Y - 6 - 6 - 8 - 8 8 - 8 - 6 14 16 8 44 45
20Y - 6 - - 6 6 - 8 - 6 - 6 6 12 8 12 38 45
30Y 3 - 3 - 5 - 5 - 6 - - - 6 5 11 0 22 20
50Y - - - - - 3.5 - - 4.5 - - - 0 3.5 4.5 0 8.0 4.5
4Y FRN - 7 - 8 - 8 - 8 - 10 - 10 7 16 8 20 51 55
CPI linked - - - - - - - - - - - - - - - - 0 9
Total 24 41 25 31 21 42.5 21 34 48.5 35 36 41 90 94.5 103.5 112 400 453.5
Source: PMDO, KBank
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3. Reduced financing needs by the government
As shown in Table 3, the government needs less funding compared to the previous two
fiscal years (total financing amounted to Bt537bn, down from Bt661bn in FY2010). In
particular, revenue collection had improved while fiscal spending to stimulate the
economy is spread out between the years as there had been strong economic growth
last year. Furthermore, a significant extent of debt-profile restructuring had been done
during the past two years - PDMO did this by issuing long-dated bonds to refinance Financing needs reduced
short-term debts, effectively lengthening the average time to maturity of the to Bt537bn in FY2011
government’s repayment profile. Hence, the overall supply outlook is positive for the from Bt661bn in FY2010
bond market. In addition, there is still substantial liquidity in the hands of investors. We on economic growth
show in two graphs below the maturing government bonds during the past quarters and
capital inflows from maturing Korean bond funds going forward.
Fig 2. Benchmark bond issuance shows PDMO’s aim for
Fig 1. FY2010 and FY2011 benchmark bond issuance
increasing liquidity in the secondary market
Bt bn Government bond issuance Bt bn Benchmark bond issuance
140 350
120 300
100 93
250
80 63 200
57
60 44 150
38
40 100
22
20 8 50
0 0
5Y 7Y 10Y 15Y 20Y 30Y 50Y FY2008 FY2009 FY2010 FY2011
FY2010 FY2011 5Y 7Y 10Y 15Y 20Y 30Y 50Y
Source: PDMO, KBank’s estimate Source: PDMO, KBank’s estimate
Outlook on bond yields and the policy rate
Backed by the hawkish comments from the Bank of Thailand (please refer to our earlier
piece on MPC minutes or www.bot.or.th), we maintain our call for another three rate Maintain expectation of
hikes during the next three MPC meetings. These hikes would bring the policy rate to 3 more rate hikes by
3.25% by July, 2011. BoT. Target 3.25% by
July
BoT continued to signal a shift of weight to inflationary concerns for its monetary policy
conduct going forward. Vis-à-vis the risks of slower-than-expected growth for Thailand
(Kasikorn Research Center had revised downwards base-case growth for Thailand this
year to 3.6% from 4.5%) in the aftermath of earthquakes and tsunamis in Japan, as
well as higher energy prices due to unrests in the MENA region (Middle-East and North
Africa), it does seem that the central bank prefers an unwavering and preemptive
approach to inflation control.
For asset allocation, we do see higher value in the mid-curve bonds: the front-end is
risky due to continued rate hikes and the long-dated bonds are not attractive in an
inflationary environment. While the supply of 5-year bonds during the next three
months is at Bt36bn, there is sufficient liquidity in the secondary market and a history of We recommend mid-
strong investors’ demand. curve bonds as long-
dated bonds are
In any case, we continue to expect the yield curve to remain in a bear-flattening mode unattractive in an
in the next quarter. The total supply of bonds with maturities of 10-30 years amounts to inflationary environment
a mere Bt45bn, an amount easily absorbed by the market. Furthermore, PDMO’s
director, Mr. Chakkrit Parapuntakul, shared with investors at a KBank seminar for
institutional investors last week that the PDMO would try to manage the supply of
bonds such that borrowing costs do not rise by too much – indicating that the Q4 bond
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4. supply for long-dated bonds could still be reduced from original plan should yields
become unfavorable for the government to borrow.
Fig 7. Maturing government bonds (calendar year) Fig 8. Maturing Korean bond funds (returning liquidity)
Bt bn
Maturing Government loan bonds Bt 90 bn
bn baht 70
61
100 89 60
88
80 70 50 44
40
60
40 30
40
20 14 14 13
9 7 9
20 10 3
3 0
0 0
Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Apr May Jun Jul Aug Sep Oct Nov Dec
Principal Korean bond funds maturing in 2011
Source: Bloomberg, KBank Source: Bloomberg, KBank
Fig 7. Yield spread 2-5 and 5-10 Fig 8. Forward implied bond curves
bps % Bond yields implied curve shifts
160 4.50
120
4.00
80
3.50
40
3.00
0
Jan-08 Jan-09 Jan-10 Jan-11 Mar-11 Jun-11 Sep-11 Dec-11 tenor (yrs)
2.50
2-5 bond spread 5-10 bond spread 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Source: Bloomberg, KBank Source: Bloomberg, KBank
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6. Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or
sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we
believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained
herein. Further information on the securities referred to herein may be obtained upon request.
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