Public Debt Management Office (PDMO) chief Patricia Mongkhonvanit on Wednesday encouraged people to purchase newly issued government savings bonds worth Bt8 billion.
The Bt8 billion issuance is part of Bt55 billion in savings bonds being offered under the Rao Chana (We Win) scheme to fund COVID-19 recovery efforts. Retail investors can buy the bonds at branches of Bangkok Bank, Kasikornbank, Krungthai Bank and Siam Commercial Bank nationwide until February 15.
What are the rates of return?
The five-year bond has an average coupon rate of 2 per cent – 1.5 per cent in the first two years, 2 per cent in the third and fourth year and 3 per cent in the fifth year.
The 10-year bond averages 2.5 per cent – 1.5 per cent in the first year, 2 per cent in the second and third years, 2.5 per cent in years 4-6 and 3 per cent in years 7-10. Interest is paid twice a year on February 5 and August 5.
Are the coupon rates high?
Interest on the bonds is relatively high compared to coupons of ordinary bonds offered to institutional investors. The Thai government currently offers institutional investors 0.6 per cent interest on five-year bonds.
However, the Finance Ministry has boosted the five-year rate for retail investors to 2 per cent, said Ariya Tiranaprakit, senior executive vice president of the Thai Bond Market Association.
What are the risks?
Thai government bonds are almost risk-free, since records show Thailand is among the few countries that have never defaulted on their debts.
One risk is that purchasers may not want to hold the bonds until they mature, in which case returns may be affected. Investors can sell unmatured bonds over the counter at banks, but the prices will depend on market conditions at the time.
Investors who hold bonds until they mature are guaranteed a full refund on their investment.
Any risk from inflation?
If the market expects inflation to rise, interest rates will rise. This erodes the real value of bonds, since their interest rate is fixed. However, the market does not expect Thailand to face higher inflation over the next few years, while medium-term headline inflation remains very low and has mostly fallen into negative territory recently.
Lingering COVID-19 fallout means Thailand’s economy is unlikely to accelerate, so the chance of interest rates rising is low, said Ariya.
Diversifying investment against market risks
Investing in government savings bonds is one way of diversifying a portfolio that may already contain stocks, gold or bank deposits, Ariya said.
And while corporate bonds (debentures) may offer higher coupon rates, they also come with higher risk since no one can guarantee that firms will not default on their debt obligations, she explained.
What about tax on bond returns?
Investors pay 15 per cent withholding tax on coupon payments and on price gains when they sell bonds before maturity. Investors who pay a lower tax rate on their annual income can add their bond investment returns to their annual income to reduce their tax burden.
Taking the full tax obligation into account, the effective coupon rate is 1.725 per cent for a five-year bond, according to the PDMO. The effective coupon rate is still higher than bank deposit rates.
Meanwhile, government bonds can be used as collateral to boost finances or avoid time in jail. Banks and financial institutions accept savings bonds as collateral for loans, while Thai courts accept them as collateral for bail.
Final thought
Each investor will have different needs and risk tolerance when it comes to investing in a variety of asset classes – bonds, debentures, stocks, gold and property.
“Savings bonds are good for long-term investors who want stable returns,” said Ariya.
By Thai PBS World’s Business Desk
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