Capital controls removal no panacea for Thai bond market
By Jon Fernquest |
Bangkok Post reporter Parista Yuthamanop talked with Nattapol Chavalitcheevin, president of Thai Bond Market Association (ThaiBMA), yesterday about the situation in Thai bond markets.
Here's the full article:
BOND MARKET
Non-resident investment to stay moderate
End of controls will not open floodgatesPARISTA YUTHAMANOP
Non-resident investment in the bond market will grow moderately in 2008 in light of declining yields in line with forecasts for offshore and onshore interest rate trends, according to Nattapol Chavalitcheevin, president of Thai Bond Market Association (ThaiBMA). The scenario is expected despite an improvement in non-resident investment after the Bank of Thailand's lifting of capital controls on March 3.
Non-resident transactions totalled 1.2 billion baht on March 3 and 2.6 billion on March 4, compared with an average 500 million per day when the capital controls were in effect. Non-resident investors' average daily transaction value stood at two billion baht per day in 2006 before the measure took effect in December.
[Comment: Transactions seem to have returned to their pre-capital controls level.]
Mr Nattapol said that non-resident holdings in the bond market were expected to stand at 70 billion baht at the end of 2008, compared with 56 billion currently and 130 billion before the capital controls took effect.
"There is a signal that foreign investment will return to the bond market but it would not be as high as in the past. In light of declining yields, stocks will be their first choice," he said.
[Comment: So part of or most of the permanent decline from 130 billion baht to 70 billion baht is due to the appreciating baht driving down yields for foreign investors?]
Non-resident investors recorded 1.2 billion baht in net buys in the first two days after the capital controls were revoked, lifting their year-to-date total to 14 billion baht. Half of the investment occurred in the medium- to long-term bonds, with maturities of more than five years.
Yields fell by 5-30 basis points on Feb 29 when the central bank announced the lifting of the controls. On Monday, yields of the five- and 10-year bonds declined by 39 and 25 basis points respectively to 3.59% and 4.39%.
"The bond market right now is supposed to be suitable for new issues. Yields for five-year bonds have dropped by half a percentage point since Monday. This is already high," Mr Nattapol said.
Bond yields had flattened as investors expected the central bank to cut its one-day repurchase interest rate to 3% in April fro 3.25% now. But rising inflation has caused an anticipation of higher interest rates in the longer term.
Mr Nattapol said that non-resident holdings currently accounted for 1% of the total market size, compared with a 2% peak when the central bank imposed the 30% reserve requirement on non-resident investment.
Non-resident trading value peaked at an average of 5-6 billion baht in 2006. Non-residents recorded 60 billion baht in net buys in 2006, compared to 36 billion in net selling in 2007.
In any case, Mr Nattapol said, regulators should not regard the bond market as a vehicle for baht speculation because total non-resident holdings of just 2% are relatively low compared to the stock market.
The bond market recorded non-resident net selling in 2007, with inflows between 100 million and 200 million baht per quarter. Meanwhile, the stock market recorded net buying by non-resident investors of 55 billion baht in 2007 and 83 billion in 2006, he noted.
Mr Nattapol also said the lifting of capital controls on the bond market was not expected to push up the baht. He expected the baht to strengthen mildly to 29-30 to a dollar in this year.
The baht will become less of a speculators' choice in 2008 as economic growth has been the lowest in the region this year. And the market has expected interest rates to be lowered in the near term, he said.
(Source: Bangkok Post, business section, page B2, 07-03-08, Parista Yuthamanop, temp-link)
Vocabulary:
not a panacea for Y - will not solve all of Y's problems, not a cure-all
open the floodgates - a sudden increase in activity (like opening the floodgates on an irrigation system and having water suddenly and quickly flow into the fields)
non-resident - foreign, non-Thai
in light of X, Y is true - given information X, I can claim that Y is true
the yield of a bond - the interest rate of the bond, the annual income from a bond expressed as a percentage of the current market price of the bond, the annual coupon of the bond divided by the market price of the bond (See The Economist glossary)
the maturity of a bond - the time when the money borrowed with a bond is repaid, the end of the bond
the yield curve of bonds - the curve that describes how the interest rate or cost of borrowing changes on bonds of different maturity (See The Economist Glossary and Wikipedia)
declining yields, yields falling across the curve - yields on all bonds fell, the whole yield curve shifted down, which means that the price of bonds rose (just think of the relationship between bond price and yield as: yield = coupon / price , price = coupon / yield, bond yields falling means bond prices rising, this makes sense after capital controls are removed, bonds with less restrictions are more valuable)
basis points - a rate change from 5% to 6% is a change of 1 percentage point or 100 basis points, 1 basis point is equal to 1/100th of 1%, used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security, also spreads between yields or interest rates, used for convenience because quantities in percentage points are small, avoids the ambiguity between relative and absolute discussions about rates: does a "1% increase" in a 10% interest rate mean that it goes from 10% to 10.1%, or to 11%? (See Wikipedia on basis points)
X in line with Y - X agrees with Y, X is what you would expect if Y is true (See glossary)
Thai Bond Market Association (ThaiBMA) - "in 1994 started as the Bond Dealers Club (BDC) under the Association of Securities Companies, played roles as the first and only organized secondary market for bonds, introduced an electronic bond trading system called 'Bondnet' for the first time in the history of the Thai bond market" (See website)
lifting of capital controls - ending, stopping capital controls
X is in effect Y - Y is a reasonable description or summary of X
a measure - an action to achieve some result
measure took effect - an action to achieve some result begins (an action such as a regulation or law)
non-resident holdings - assets held by foreigners
net buys - the amount by which buys exceed sales
revoked - cancelled (by someone with authority)
year-to-date - total amount from the beginning of hte year to now
lifting their year-to-date total to Y - increasing the total to Y
not regard X as Y - should not believe that X is Y
X is a vehicle for Y - X is used to achieve goal Y
recorded non-resident net selling - foreigners sold more than they bought on the bond market
recorded non-resident net buying - foreigners bought more than they sold on the bond market
