People putting their lifetime savings into fixed-income assets want just that _ some sense of certainty and security about their future incomes in this ever-changing world.
But technically, the privilege of knowing for sure what the future will bring does not exist, not in the long run. The returns may come as promised but there is no guarantee of the lifestyle one hopes to keep by spending the same amount of money one pays today.
The villain here is inflation _ something central banks of economies that show some signs of life are battling as part of their job descriptions to varying degrees of success.
Looking back over the past several years, everyone has a story to tell about eroding purchasing power. Prices of housing, food, fuels and other goods have been rising. The increases mean less money in everyone's pocket as the same amount cannot buy as many things as in the past.
So the crux of effective long-term investment is to fight inflation while ensuring a good opportunity to earn some interest and capital gains.
The portfolio of every investor should therefore comprise some safe assets to hedge against day-to-day volatility in stocks. Some groups of investors, such as retirees who are more vulnerable to inflation risk, also prefer fixed returns and regular payments.
To the rescue was the Finance Ministry's Public Debt Management Office (PDMO), which in July 2011 began to issue bonds which promise a rate of return that beats inflation, plus extra yields. They are called inflation-linked bonds (ILBs).
Thailand's first lot of ILBs is called ILB217A. It was initially 40 billion baht in size, with a maturity of 10 years and a coupon rate that tracks the Bank of Thailand's headline consumer price index.
The issuance made Thailand the first country in Asean to issue inflation-linked government bonds. South Korea and Hong Kong are the other two countries in Asia offering the same products.
Unlike regular government bonds, the yields of ILBs consist of three components. First is the fixed coupon rate. Second is the compensation for the inflationary effect on the coupon rate, paid twice a year at a rate equal to the Bank of Thailand's inflation reference index. Third is the compensation for the inflationary effect on the capital, or the amount of money paid by buyers, which will be paid together with the capital when the bonds are redeemed.
The PDMO has recently increased the size of the ILB217A to 100 billion baht but the maturity date remains the same, on July 14, 2021. The PDMO has to date paid yields three times: Jan 14 and July 14, 2012 and Jan 14, 2013, at a combined 3.69%.
The PDMO has recently announced that it would issue another lot of ILBs, this time with a 15-year maturity worth up to 40 billion baht next month. Like the previous tranche, the new bonds offer compensation for inflationary effect on capital.
The move has attracted interest in the international and domestic markets because it will make Thailand the first country in Asia to build a yield curve of the ILBs, with the 10-year ILBs having only eight years in remaining maturity.
A yield curve is a relationship between the interest rate and the time to maturity of a debt instrument denominated in a given currency. It serves as a benchmark for the product's prices, allowing the issuer to borrow more and attract more customers.
Chularat Suteethorn, the PDMO's director general, said the lot would be enlarged to 100 billion baht in the future to ensure liquidity.
For retail investors, the new product will give both retirees and young people more tools to manage their portfolios.
"The ILBs are suitable for investors who look for security or plan long-term savings while maintaining their purchasing power over a period. They might want to buy them for retirement or for their children's education. The ILBs offer fixed returns and regular interval payments so investors can calculate incomes and plan their spending accordingly," Ms Chularat said.
She said the new lot of ILBs has been allocated to three groups of investors: local institutions including insurance firms, the Government Pension Fund, the Social Security Fund, and financial institutions for a combined 50% of the total; foreign institutions (38%) and local retail investors (12%).
"Interestingly, of the local retail investor group, 3,125 are individuals and 1,390 are savings co-operatives. This shows more local investors are interested in sophisticated forms of government bonds," Ms Chularat said.
Andre de Silva, HSBC's managing director and head of Asia-Pacific Rates, Global Research, said the first lot of ILBs had become more attractive than other government bonds.
They now offer a real yield of 0.9%, based on the HSBC's inflation forecast of 3.2%. The bonds, therefore, offer a 2.77% spread from the market price of 4%, compared to the yields of 10-year government of 3.6%.
"The spread of 2.77% reflects anticipation of inflation. It shows that the price of the ILBs is still cheap at the moment, considering our inflation forecast of 3.2% which is in line with that of the government's," Mr de Silva said. "The 0.9% yield doesn't sound high, but by international comparison, it is. In the US, Japan and Germany, government bonds carry negative yields."
He said bond yields would be depressed by the new supply of more government issuances to finance some of the 2-trillion-baht infrastructure projects and the 2014 annual budget from the third quarter of this year onwards. Therefore, ILBs will be a good alternative for investors.
"While South Korea has the most sizeable ILB market, the tenors are limited at 10 years. Thailand will be the first country in Asia to issue 15-year ILBs, which will improve the depth and breadth of the market and build a yield curve. This is encouraging to domestic and international investors," he said.
About the author
- Writer: Wichit Chantanusornsiri
Position: Business Reporter