Foreign investors - the major players in the local bond market - are now expected to pull their money out of the country or park their funds somewhere else.

The Finance Ministry recently revised its bond issuance schedule. It would take out short-term loans from financial institutions in the early stage, but would issue bonds when the market turns favourable.

Bonds worth Bt146 billion were set to be issued according to the government's fiscal deficit plan, while bonds worth Bt170 billion were set to replace the Finance Ministry's treasury bills, as the ministry wants to let only the central bank issue short-term paper.

The central bank's draconian measure seemed to hit the stock market harder than the bond market on its first day but in the long term it would send a domino effect to the bond market, possibly causing an oversupply and rising yield curve.

Bond yields move in the opposite direction of prices.

According to the Thai Bond Market Association, until December 22, outstanding bonds of longer than one year held in non-residents' portfolios amounted to Bt103 billion. The yield curve has continued to rise as there's a selling force but no one buys.

Nattapol Chavalitcheevin, president of Thai BMA, said bond yields of all maturities have climbed steadily with the yield of long-term bonds reaching the level where it was early this year when interest rates started to rise. The yield began to move up early this month after the central bank announced a series of measures - including prohibiting non-resident sales and buybacks of short-term bonds from financial institutions - in a bid to prevent currency speculation.

In the two weeks before Black Tuesday, the 10-year bond yield rose 67 basis points, Nattapol said. The yield of 20-year bonds rose 86 basis points. Then the yields of both maturities jumped by 30 basis points in a single day on Black Tuesday.

Besides the Bt316 billion in new government bonds, blue-chip companies, which this year sold bonds overseas, are likely to issue domestic bonds next year. This will cut into the loans the banks intend for SMEs.

Piyarat Setthasiriphaiboon

The Nation