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K bank capital market perspectives Dec 28, 2010 bond supply

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  • 1. KBank Capital Market Perspectives Market Updates Macro / FX / Rates News update for local bond supply in Q1 28 December 2010 Summary of Q2/FY2011 bond supply Nalin Chutchotitham - Kasikornbank nalin.c@kasikornbank.com The Public Debt Management Office (PDMO) has released its bond auction plan for the January- March 2011 period (Q2 of fiscal year 2011) last week. Total supply for the quarter is increased to Bt94.5bn from Bt90bn in Q1, inclusive of the Bt3.5bn of the new 50-year bond issue. - In general, we expect that there would be ample liquidity to absorb the new bonds in FY2011, especially as Bt160bn of government bonds mature during the course of the year, indicating a net issuance for FY2011 of about Bt290bn (Fig 1), based on the PDMO- th Market Dialogue document dated September 17 . - Based on the current implied yields, the sovereign yield curve is likely to see a bear- flattening trend going forward (Fig 2), primarily due to the expectation of policy rate hikes and the maintenance of high level of liquidity. Disclaimer: This report - Other important factors include the timing of rate hikes by BOT, which could be as early as January and March. Inflation rates are expected to climb gradually but the danger is that must be read with the the market has yet to fully price in price pressure from higher world commodity prices. Disclaimer on page 6 that forms part of it Key changes to the Q1/FY2011 auction plan, according to the PDMO’s press release: - Government’s Treasury cash at the end of the year is estimated at Bt250bn, hence there would be no auctions of treasury bills in the month of January and February. (This is expected to bring the treasury cash down to Bt75bn at the end of the quarter) - The per-auction size of 5-10 year bonds are reduced from last year’s Bt12.5bn to Bt10bn. While the per-auction size of 30-year bonds is raised from Bt3bn to Bt5bn. The supply of 7-year bonds is relatively unchanged from the initial plan, at Bt20bn in total for an auction size of Bt10bn. There is a possibility that the smaller issuance of the 5-year issue and relatively larger size of the 7-year issue would contribute to a widening yield spread between the two tenors. - The auction size of 50-year bond is raised from Bt1.5bn to Bt3.5bn. There is also a possibility that the PDMO would issue more of the issue if demand turns out to be positive. - We clarified with the PDMO with regards to changes to the initial plan (Table 3.) and received the following response: there would be minor changes to the total issuance of each tenor but nothing is final, pending on future market trends. Fore example, the total issuance of 10-year bonds might be reduced from Bt70bn to Bt60bn and issuance of 12- year bonds might be reduced from Bt40bn to Bt25bn.Fig 1. Maturing bonds in FY2011 Fig 2. Implied bond yield curve shifts (3m, 6m, 12m) % Maturing Government loan bonds Implied bond yield curve shifts bn baht 4.50 FY2011 maturing principal: Bt160bn 120 4.00 100 3.50 80 60 3.00 40 2.50 20 2.00 0 1.50 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Principal Interest Dec-10 Mar-11 Jun-11 Dec-11 tenor (yrs)Source: Bloomberg, KBank Source: Bloomberg, KBank 11 1
  • 2. In addition, the PDMO also stated the following changes that investors could expect as partof the ongoing development of the bond market: - Authorities are preparing for the eventual issuance of inflation-linked bonds in May 2011. Prior to the first auction, the PDMO and other related organizations would hold meetings in order to allow for greater understanding among key market participants. - Savings bonds of tenor 7-12 year may be added to bond issuance of FY2011 (expected in April). There was no initial budget allocated but the change might involve a total of Bt100bn of savings bonds. It has been yet decided if fixed rate or step-up coupon would be used. The primary purpose of these bonds is to restructure the short-term borrowings under the second fiscal stimulus package or commonly known as TKK plan. In any case, we expect limited impact from this lot, since the target investor group is senior citizens and other individuals. However, it could reduce demand for the 7-12 year loan bonds among the saving cooperatives, which are eligible for the primary market purchase of savings bonds. - Development of Primary Dealers’ roles (PD) – PDMO is assessing the performance of PDs and other parties involved in the trading of government debt instruments during the past 3 years for future development of the PD program. The eventual changes to the roles of PDs would likely be finalized in March 2011. ndUpdate on fixed rate P/N auction on December 22 - Due to substantial demand from long-term investors such as pension funds and insurance companies, the government has recently auctioned a new type of security - 12- and 18-year fixed rate P/N. In the past, P/N had often been issued with floating rates. The issuance of these notes can thus be seen as being targeted at specific investor group without changing the supply plan of the loan bonds. At the same time, trading limitations of P/N as compared to the LBs mean that the government is not increasing the accessibility of baht assets to speculators but investors would have less liquidity. The only problem we see now is that there might be some difficulties with marking-to-market of these securities, given the absence of a secondary market. - The initial B/C ratio is 1.13 for a total of Bt39.77bn issuance (initial FY2011 budget: Bt45bn) is a little low but helps to substantiate the continued assessment that long-term investors’ demand for longer-term securities remained. Although actual yields have yet to be announced, we expect 20-50bp of mark-up above the sovereign yields as compensation for liquidity. Proceeds from the issuance would be used to refinance the short-term bank loans made under the Bt400bn executive decree enacted last year. Table 1. Announced loan bond auction calendar for Jan- Mar 2011 unit : million baht Auction Float rate Date LB15DA LB17OA LB21DA LB25DA LB316A LB416A LB616A LB14NA Total 05-Jan-11 - - - - - - - - 0 12-Jan-11 - - - 6,000 - - - - 6,000 19-Jan-11 - 10,000 - - - - - 8,000 18,000 26-Jan-11 - - 7,000 - - - - - 7,000 02-Feb-11 - - - - 6,000 - - - 6,000 09-Feb-11 10,000 - - - - - - - 10,000 16-Feb-11 - - - - - 5,000 - - 5,000 23-Feb-11 - - - 8,000 - - - - 8,000 02-Mar-11 - - 7,000 - - - 3,500 - 10,500 09-Mar-10 - - - - - - - - 0 16-Mar-11 - - - - 6,000 - - 8,000 14,000 23-Mar-11 - - - - - - - - 0 30-Mar-11 - 10,000 - - - - - - 10,000 Total 10,000 20,000 14,000 14,000 12,000 5,000 3,500 16,000 94,500 Source: PMDO222
  • 3. Update on government’s revenues and expenditures - Overall, the fiscal position remained relatively strong but fiscal balance (cash basis) had declined as of end-November as the government quickened the pace of spending to help boost the economy. Revenues remained on the rise but at a slower pace compared to the expenditure, resulting in a budget deficit of Bt222bn (12-month running sum) as compared to a deficit of Bt85bn at end fiscal year 2010 or September 30th. - Caveats: government’s excise tax cut for diesel may worsen the fiscal position if it came through. The Excise Department estimates that there could be a loss of Bt18bn of tax revenue per year for a 1 baht cut in excise tax for fuels. At the same time, the government’s extension for 4-measure subsidies to end-February 2011 (NGV, electricity, public buses, and class-3 train fares) would also have similar negative impact on fiscal burden.Fig 3. Government revenues and expenditure (12-m Fig 4. Government budget deficit (12-m moving sum) vs.moving sum) 2-10 bond spread Bt bn 12-month moving sum of fiscal balance (cash basis) 200 0 2,200 100 50 2,000 0 100 1,800 -100 150 1,600 -200 1,400 200 -300 1,200 -400 250 1,000 -500 300 800 -600 350 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 03 04 05 06 07 08 09 10 Revenues (left axis) Expenditures (left axis) 12mth budget balance, THB bn, left axis 2-10s, bps, right axis, invertedSource: CEIC, KBank Source: CEIC, Bloomberg, KBankFig 5. Government loan bond supply comparison Fig 6. Yield curve movement Bt bn Loan bond issuance bp Government bond yield change % 500 45 4.5 Inflation-linked bonds (7-15Y) 450 40 Floating-rate bonds (4Y) 4.0 400 Non-benchmark bonds 35 350 Benchmark bonds 30 3.5 300 25 250 3.0 20 200 150 15 2.5 100 10 2.0 50 5 0 0 1.5 FY2008 FY2009 FY2010 FY2011 0.3 0.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 15.0 20.0 yrs Spread (left axis) 27-Dec-10 18-Dec-10Source: PDMO, KBank Source: Bloomberg, KBankFig 7. Substantial bond-swap spread remains Fig 8. Foreign holding of local debt securities stable % % Bt bn Foreign holding in Thai GBs & fixed income year-to-date Bt bn 3.0 3.0 250 60 200 50 2.5 2.5 40 150 30 2.0 2.0 100 20 50 10 1.5 1.5 0 0 1.0 1.0 -50 -10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 IRS 1Y 1Y bond Bibor 3m Holding (bn baht, left axis) Outright trading volume (4wk-avg, bn baht. right axis) thSource: Bloomberg, KBank Source: Thai BMA (a jump in Dec 24 week is due to an additional data source), KBank 33 3
  • 4. Table 2. The initial PDMO FY2011 Financing Plan Unit : in billions of baht FY2010 FY2011 Change Treasury bills -127.0 50.0 177.0 Benchmark bonds 313.0 349.5 36.5 5Y 121.6 100.0 -21.6 7Y - 65.0 65.0 10Y 74.0 70.0 -4.0 15Y 47.0 45.0 -2.0 20Y 50.4 45.0 -5.4 30Y 20.0 20.0 0.0 50Y - 4.5 4.5 Non-benchmark bonds 75.0 40.0 -35.0 2Y - - 3Y - - 7Y 55.0 - 8Y 12.0 - 12Y 8.0 40.0 14Y - - Floating-rate bonds (4Y) 47.0 55.0 8.0 Inflation-linked bonds (7-15Y) 0.0 9.0 9.0 Total Loan Bonds 435.0 453.5 18.5 Savings bonds 82.0 0.0 -82.0 P/N 106.2 115.5 9.3 (5Y and above) 106.2 70.5 Restructuring (12-20Y) - 45.0 Bank loans 178.0 -30.0 -208.0 2-4Y 178.0 60.0 Restructuring - -90.0 Other tools (tba in April 2011) - 120.0 120.0 Grand Total 674.2 709.0 34.8 Source: PDMO, KBank Table 3. LB auction plan for FY2011 (Q3 and Q4 estimates based on the initial PDMO document) unit : billion baht Expect PDMO tenor Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Q1 Q2 Q3 Q4 Total Budget 5Y 13 - 14 - 10 - 13 - 14 - 20 - 27 10 27 20 84 100 7Y - 12 - 10 - 10 - 12 - 9 - 9 12 20 12 18 62 65 10Y - 10 - 7 - 7 - 13 - 10 - 13 10 14 13 23 60 70 12Y 8 - 8 - - - 6 - 6 - 6 - 16 0 12 6 34 40 15Y - 6 - 6 - 8 - 8 - 6 - 8 6 14 8 14 42 45 20Y - 6 - - 6 6 - 10 - 6 - 6 6 12 10 12 40 45 30Y 3 - 3 - 5 - 3 - 3 - 5 - 6 5 6 5 22 20 50Y - - - - - 3.5 - 1.5 - - 1.5 - 0 3.5 1.5 1.5 6.5 4.5 4Y FRN - 7 - 8 - 8 - 7 - 10 - 10 7 16 7 20 50 55 CPI linked - - - - - - - 3 - - 3 - 0 0 3 3 6 9 Total 24 41 25 31 21 42.5 22 54.5 23 41 35.5 46 90 94.5 99.5 122.5 406.5* 453.5 Source: PMDO, KBank (red block denotes actual schedule) *Note: Difference between total estimated supply and the initial PDMO budget of Bt453.5 comes from a smaller-than-expected supply in Q2*Please note that the last column is pending on changes by PDMO as the year progresses444
  • 5. Table 4. Monthly Key Economic Indicators Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10Manufacturing index 180.0 185.0 194.2 190.1 183.7 201.5 191.6 % YoY 23.4 15.9 14.2 13.1 8.4 8.1 6.2Industrial capacity utilization rate (%) 58.3 64.3 65.4 64.8 63.6 64.4 64.1Retail sales (% YoY) 12.0 8.1 11.8 12.2 8.5 8.5 8.5Total vehicle sales (units) 57,128 62,205 70,557 65,672 65,724 68,261 72,012 78,874Motorcycle sales (units) 143,988 138,558 168,389 175,926 153,256 147,932 145,916Unemployed labor force (000 persons) 451 586 459 346 353 343Unemployment rate (%) 1.2 1.5 1.2 0.9 0.9 0.9Consumer prices (% YoY) 3.0 3.5 3.3 3.4 3.3 3.0 2.8 2.8 core 0.5 1.2 1.1 1.2 1.2 1.1 1.1 1.1Producer prices (% YoY) 8.5 8.0 11.5 11.1 10.7 9.1 6.3 5.9External Accounts (USD mn, unless specified otherwise)Exports 13,832.0 16,436.0 17,878.0 15,475.0 16,292.0 17,955.0 17,046.0 % YoY 34.7 42.5 47.1 21.2 23.6 21.8 16.6Imports 14,022.0 14,137.0 15,342.0 16,266.0 15,440.0 14,712.0 14,604.0 % YoY 44.0 53.5 38.3 36.5 41.8 15.7 13.0Trade balance -190.0 2,299.0 2,536.0 -791.0 852.0 3,243.0 2,442.0Tourist arrivals (000) 1,108 815 953 1,258 1,268 1,220 1,360 % YoY 2.1 -11.8 -0.2 14.7 12.5 1.9 6.3Current account balance -289.0 1,172.0 814.0 -1,001.0 280.0 2,767.0 2,909.0Balance of payments 3,749 -989 2,166 1,412 3,589 4,270 5,822FX reserves (USD bn) 147.6 143.4 147.1 151.5 154.7 163.1 171.1Forward position (USD bn) 11.9 13.0 12.2 11.0 12.1 11.1 12.6Monetary conditions (THB bn, unless specified otherwise)M1 1,182.5 1,261.9 1,180.2 1,173.0 1,181.4 1,175.5 1,202.3 % YoY 11.5 14.4 15.1 15.8 11.4 11.7 11.4M2 10,831.8 11,001.5 10,846.4 10,887.1 10,968.1 11,116.1 11,321.4 % YoY 5.4 6.7 6.9 8.7 8.4 9.8 11.1Bank deposits 9,975.6 10,229.1 9,983.3 9,974.5 10,015.9 10,091.6 10,204.1 % YoY 4.6 7.0 6.2 7.6 6.6 7.8 8.5Bank loans 8,995.4 9,101.2 9,196.7 9,219.7 9,299.8 9,432.7 9,580.5 % YoY 6.0 7.3 8.5 9.1 9.8 10.8 12.1Interest rates (% month end)BOT 1day repo (effective) 1.12 1.12 1.12 1.12 1.12 1.12 1.12 1.12BOT 1 day repo (target) 1.25 1.25 1.25 1.50 1.75 1.75 1.75 1.75Average large banks minimum lending rate 5.86 5.86 5.86 6.00 6.00 6.00 6.00 6.00Average large banks 1 year deposit rate 0.68 0.68 0.68 0.98 0.98 1.11 1.11 1.11Govt bond yield 1yr 1.60 1.52 1.56 1.91 1.99 2.01 1.98 2.11Govt bond yield 5yr 3.12 3.06 2.99 3.08 2.69 2.56 2.83 2.98Govt bond yield 10yr 3.67 3.49 3.33 3.44 3.01 3.12 3.18 3.59Key FX (month end)DXY US dollar index 81.87 86.59 86.02 81.54 83.20 78.72 77.27 81.20USD/THB 32.40 32.52 32.45 32.24 31.27 30.35 29.94 30.21JPY/THB 34.46 35.63 36.62 37.29 37.14 36.34 37.18 36.11EUR/THB 43.07 40.02 39.71 42.08 39.65 41.38 41.76 39.22Source: Bloomberg555
  • 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.666

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