Sep. 24--Interest rates are unlikely to rise before 2011, when the economy should have fully shaken off the impact of the global downturn, says Nattapol Chavalitcheevin, the president of the Thai Bond Market Association.

If interest rates do increase in 2010, only a minor rise is expected which would come sometime in the second half of the year, he said.

The Bank of Thailand has maintained its policy rate of 1.25 percent for much of the year, with bank prime lending rates now quoted at 5.875 percent and one-year fixed deposit rates at 1 percent.

Mr Nattapol said liquidity in the banking system remained plentiful, with an excess estimated at 600 billion baht.

"We have to keep an eye on demand and supply next year to see whether the surplus liquidity will be completely absorbed," he said. "Then we'll be able to see whether the interest rate will go up.

"Inflation rates are not expected to rise much next year with the gradual recovery, so there is no need yet for the Bank of Thailand to increase interest rates."

The central bank, in its July Inflation Report, projected the consumer price index this year would range from -1.5 percent to zero and rise to 3.5 percent to 5.5 percent in 2010.

He said the bond market was on pace for a new high this year, with 320 billion baht in corporate debentures issued to date. Average terms for new debt in the market are three to five years.

Mr Nattapol said low interest rates and the reluctance of local banks to extend credit are the main factors supporting new issuance.

The ThaiBMA expects 350 billion baht worth of new debentures to be issued this year, with companies in the construction materials and energy sectors leading all issuers.

"We should reach the target by November and what we get in December will be a bonus," Mr Nattapol said.

Local institutional investors meanwhile remain reluctant to invest in the bond market and have largely looked overseas in favour of more lucrative foreign fixed-income securities.

Mr Nattapol noted that in Malaysia and South Korea, the government offered assistance to poorly rated companies seeking to use the bond market.

"Our market is growing slowly as we don't really have the full support of the government when it comes to real implementation," he said.

Fund inflows from investments in maturing Korean debt could affect liquidity conditions in the months ahead, said Boonchai Kiattanavith, managing director of Thanachart Fund.

In 2008, local fund managers launched 300-400 billion baht worth of Korean bond foreign investment funds. Repatriations of the funds would help mitigate worries that market liquidity will fall as the government ramps up borrowing to fund its investment programmes over the next several years.

Mr Boonchai agreed that interest rates are unlikely to rise for now.

"If looking at fundamentals, it's difficult to see why interest rates would increase. But the market expects interest rates to rise, so fixed-income investors should shorten the durations of their portfolios to minimise the impact [of rising market rates]," he said.

At present, Thanachart Fund maintains durations of less than one year for most of its fixed-income investments, he said.

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