Thai government bond yields are likely to rise steadily over the next 12 months due to inflation, the economic recovery, a shift in flows to equities and a jump in new bonds to raise funds for stimulus spending, analysts said. Yields on five-year government bonds could rise to 3.3-4.0 percent by the end of 2009 and 3.8-4.5 percent a year from now, up from bids at a high of 3.18 percent on Friday, dealers said.
"Much of the upward pressure will come from rising inflation, but the current shift of funds from fixed income to stocks seen in many countries will also force yields up," said Kobsidthi Silpachai, head of Capital Markets Research of Kasikorn Bank. Kobsidthi expects the 10-year government bond yield to rise to 4.5 percent by December from 3.95 percent now, while ING forecasts 4.4 percent. Further out, Kasikorn Bank sees the 10-year yield at 5.0 percent by the third quarter of 2010.
The central bank forecasts inflation at between between 3.5 and 5.5 percent in 2010, after a probable fall in prices of up to 1.5 percent this year. Yields moved up on Friday after Finance Minister Korn Chatikavanij told Reuters the government planned to borrow about 500 billion baht ($14.7 billion) in the fiscal year starting October 1 to fund the budget deficit and stimulus spending.
That compares with the 390.5 billion baht of bonds the government has said it would sell in the year to end-September. The five-year bid yield rose 3 basis points (bps) to the highest in almost two weeks at 3.18 percent and 14-year bid yields were up 2 bps at 4.35 percent. Bids on 29-year bonds rose 25 bps to 4.90 percent.
"If total government bond supply in the form of loan bonds is in the region of 350-400 billion baht, bond markets should react positively," said Danny Suwanapruti, a fixed income strategist at Standard Chartered Bank in Singapore. "If it is between 500 and 600 billion baht, markets are likely to react negatively," he said.
Korn said the government planned to offer another 50 billion baht in savings bonds to small investors in November after selling 80 billion baht in July.. A ministry source said that could be part of the 500 billion baht borrowing. "What pressures the market is measures that drain out liquidity, especially savings bonds, so there is less and less excess liquidity ... That harms bond purchasing power," a dealer at a foreign bank said.
In Friday's auction of 14-day central bank bonds, the accepted yield rose to 1.14377 percent from 1.12826 percent at Thursday's auction, and only 41.7 billion baht of paper was sold out of the 45 billion on offer. A changing interest rate outlook could add to the pressure.
Economists have said the central bank could hold its official rate at a record low 1.25 percent until mid-2010 but, with the economy showing clearer signs of recovery in the past two months and consumer prices set to tick higher, the Bank of Thailand may move to tighten monetary policy sooner than expected. In Thursday's interview, Korn said: "There's still sufficient excess liquidity in the system, so I don't expect interest rates to pick up perhaps until the end of this year or early next year." Kobsidthi of Kasikorn said the central bank would probably begin raising rates in the second quarter of 2010.