K bank perspectives bond supply update

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K bank perspectives bond supply update

  1. 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 environmentQ3 bond supply in line with initial estimate KBank Capital MarketThe Ministry of Finance would be issuing a total of Bt103.5bn of bonds in the third Research can now bequarter 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-linkedbonds that remained unofficial despite much news and excitement among theregulators and investors. We expect that the market would continue to have highdemand for government bonds, due to the high level of liquidity among savers. Foreigninvestors’ inflows into the bond market had slowed in recent months but continued tobe observable. An added risk factor to the performance of the bond market is theincreases in fixed deposit rates, which had risen rapidly due to banks’ competition andloan 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, KBank111
  2. 2. Table 2. Auction calendar for Apr - Jun 2011 unit : million baht Float rate Auction Date LB15DA LB17OA LB21DA LB25DA LB316A LB416A LB616A LB14NA Total 06-Apr-11 - - - - - - - - 0 13--Apr-11 - - - - - - - - 0 20-Apr-11 - - - - - - - - 0 27--Apr-11 16,000 - - 8,000 - - - - 24,000 03-May-11 - - - - - 5,000 - - 5,000 11- May-11 - - 10,000 - - - - - 10,000 18- May-11 - - - - 8,000 - - - 8,000 25- May-11 - - - - - - - 8,000 8,000 01- Jun-11 - - - - - - - - 0 08- Jun-11 - - - - - - 4,500 - 4,500 15 Jun-11 20,000 - - 8,000 - - - - 28,000 22- Jun-11 - 10,000 - - - 6,000 - - 16,000 29-Jun-11 - - - - - - - - - Total 36,000 10,000 10,000 16,000 8,000 11,000 4,500 8,000 103,500Source: PMDO, KBankTable 3. Summary of government’s financing needs in billions of baht FY2008 FY2009 FY2010 FY2011Treasury bills 0.0 134.0 -127.0 -74.0Benchmark bonds 178.0 207.3 313.0 325.0 5Y 72.0 74.4 121.6 93.0 7Y - - - 63.0 10Y 53.0 62.7 74.0 57.0 15Y 24.1 26.7 47.0 44.0 20Y 24.0 38.0 50.4 38.0 30Y 5.0 5.5 20.0 22.0 50Y - - - 8.0Non-benchmark bonds 45.7 154.0 84.0 24.0 2Y - 88.0 - - 3Y 12.7 50.0 9.0 - 7Y - - 55.0 - 8Y 10.0 - 12.0 - 12Y 8.0 16.0 8.0 24.0 14Y 15.0 - - -Floating-rate bonds (4Y) 0.0 22.0 47.0 51.0Inflation-linked bonds 0.0 0.0 0.0 40.0 Total Bonds (LBs) 223.7 383.3 444.0 400.0Savings bonds 18.0 80.0 82.2 100.0P/N 31.0 50.0 106.2 70.5 (5Y and above) 31.0 50.0 106.2 70.5 Restructuring (12-20Y) - - - 45.0Net bank loans 0.0 30.0 155.5 -30.0 2-4Y - 30.0 237.7 60.0 Restructuring - - -82.2 -90.0Others - - - 30.0 Grand Total 272.7 677.3 660.9 536.5Source: PDMO, KBanks estimates (grand total slightly different from PDMO’s presentation due to estimates)222
  3. 3. Reduced financing needs by the governmentAs shown in Table 3, the government needs less funding compared to the previous twofiscal years (total financing amounted to Bt537bn, down from Bt661bn in FY2010). Inparticular, revenue collection had improved while fiscal spending to stimulate theeconomy is spread out between the years as there had been strong economic growthlast year. Furthermore, a significant extent of debt-profile restructuring had been doneduring the past two years - PDMO did this by issuing long-dated bonds to refinance Financing needs reducedshort-term debts, effectively lengthening the average time to maturity of the to Bt537bn in FY2011government’s repayment profile. Hence, the overall supply outlook is positive for the from Bt661bn in FY2010bond market. In addition, there is still substantial liquidity in the hands of investors. We on economic growthshow in two graphs below the maturing government bonds during the past quarters andcapital inflows from maturing Korean bond funds going forward. Fig 2. Benchmark bond issuance shows PDMO’s aim forFig 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 50YSource: PDMO, KBank’s estimate Source: PDMO, KBank’s estimateOutlook on bond yields and the policy rateBacked by the hawkish comments from the Bank of Thailand (please refer to our earlierpiece on MPC minutes or www.bot.or.th), we maintain our call for another three rate Maintain expectation ofhikes during the next three MPC meetings. These hikes would bring the policy rate to 3 more rate hikes by3.25% by July, 2011. BoT. Target 3.25% by JulyBoT continued to signal a shift of weight to inflationary concerns for its monetary policyconduct 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 thisyear to 3.6% from 4.5%) in the aftermath of earthquakes and tsunamis in Japan, aswell as higher energy prices due to unrests in the MENA region (Middle-East and NorthAfrica), it does seem that the central bank prefers an unwavering and preemptiveapproach to inflation control.For asset allocation, we do see higher value in the mid-curve bonds: the front-end isrisky due to continued rate hikes and the long-dated bonds are not attractive in aninflationary environment. While the supply of 5-year bonds during the next threemonths 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 areIn any case, we continue to expect the yield curve to remain in a bear-flattening mode unattractive in anin the next quarter. The total supply of bonds with maturities of 10-30 years amounts to inflationary environmenta mere Bt45bn, an amount easily absorbed by the market. Furthermore, PDMO’sdirector, Mr. Chakkrit Parapuntakul, shared with investors at a KBank seminar forinstitutional investors last week that the PDMO would try to manage the supply ofbonds such that borrowing costs do not rise by too much – indicating that the Q4 bond333
  4. 4. supply for long-dated bonds could still be reduced from original plan should yieldsbecome 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 2011Source: Bloomberg, KBank Source: Bloomberg, KBankFig 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 14Source: Bloomberg, KBank Source: Bloomberg, KBank444
  5. 5. Table 1. Monthly Key Economic Indicators Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan-11 Feb-11Manufacturing index 190.1 183.7 201.5 191.2 190.4 190.2 190.2 % YoY 13.1 8.4 8.1 6.0 5.7 -2.5 5.9Industrial capacity utilization rate (%) 64.8 63.6 64.4 63.9 63.6 62.4 62.1Retail sales (% YoY) 12.3 8.6 9.1 5.4 8.1 7.4 n.a.Passenger car sales (units) 65,672 65,724 68,261 72,012 78,874 93,122 93,122Motorcycle sales (units) 175,926 153,256 147,932 145,916 154,971 165,658 165,658Unemployed labor force (000 persons) 346 353 343 355 389 268 n.a.Commercial car sales (units) 0.9 0.9 0.9 0.9 1.0 0.7 n.a.Consumer prices (% YoY) 3.4 3.3 3.0 2.8 2.8 3.0 3.0 2.9 core 1.2 1.2 1.1 1.1 1.1 1.4 1.3 1.4Producer prices (% YoY) 11.1 10.7 9.0 6.3 5.9 6.7 6.0 7.4External Accounts (USD mn, unless specified otherwise)Exports 15,475.0 16,292.0 17,955.0 17,046.0 17,584.0 17,220.0 16,523.0 % YoY 21.2 23.6 21.8 16.6 28.7 18.6 21.4Imports 16,266.0 15,440.0 14,712.0 14,773.0 17,094.0 15,911.0 17,111.0 % YoY 36.5 41.8 15.7 14.4 35.0 8.8 31.2Trade balance -791.0 852.0 3,243.0 2,273.0 490.0 1,309.0 -588.0Tourist arrivals (000) 1,258 1,268 1,220 1,360 1,500 1,840 1,840 % YoY 14.7 12.5 1.9 6.3 10.3 9.5 14.7Current account balance -1,001.0 280.0 2,767.0 2,740.0 1,019.0 1,750.0 1,090.0Balance of payments 1,412 3,589 4,270 5,822 820 2,263 1,689FX reserves (USD bn) 151.5 154.7 163.1 171.1 168.2 172.1 174.0Forward position (USD bn) 15,475.0 16,292.0 17,955.0 17,046.0 17,584.0 17,220.0 16,523.0Monetary conditions (THB bn, unless specified otherwise)M1 1,173.0 1,181.4 1,175.5 1,202.3 1,235.4 1,302.4 1,326.7 % YoY 15.8 11.4 11.7 11.4 10.8 10.9 15.6M2 10,887.1 10,968.1 11,116.1 11,323.3 11,497.6 11,776.4 11,818.5 % YoY 8.8 8.5 9.9 11.2 11.1 10.9 11.5Bank deposits 9,974.5 10,016.0 10,091.6 10,206.0 10,392.3 10,583.4 10,607.0 % YoY 7.6 6.6 7.8 8.5 8.1 8.7 8.9Bank loans 9,219.7 9,299.8 9,432.7 9,580.3 9,751.1 9,934.4 10,058.9 % YoY 9.1 9.8 10.8 12.1 12.2 12.5 14.4Interest rates (% month end)BOT 1 day repo (target) 1.50 1.75 1.75 1.75 1.75 2.00 2.25 2.25Average large banks minimum lending rate 6.00 6.00 6.00 6.00 6.00 6.12 6.37 6.37Average large banks 1 year deposit rate 0.98 0.98 1.11 1.11 1.11 1.32 1.51 1.51Govt bond yield 1yr 1.91 1.99 2.01 1.98 2.11 2.38 2.54 2.68Govt bond yield 5yr 3.08 2.69 2.56 2.83 2.98 3.26 3.40 3.48Govt bond yield 10yr 3.44 3.01 3.12 3.18 3.59 3.77 3.85 3.89Key FX (month end)DXY US dollar index 81.54 83.20 78.72 77.27 81.20 79.03 77.74 76.89USD/THB 32.24 31.27 30.35 29.94 30.21 30.06 30.93 30.60JPY/THB 37.29 37.14 36.34 37.18 36.11 37.01 37.60 37.47EUR/THB 42.08 39.65 41.38 41.76 39.22 40.23 42.35 42.25Source: Bloomberg555
  6. 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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