Taiwan's Finance Ministry to Buy Back Idle Gov't Bonds

To trigger more active trading of government bonds, the Ministry of Finance (MOF) in Taiwan will buy back some NT$20 billion (US$606 million, at US$1=NT$33) of idle government bonds in 2010, the first time ever and in exchange for issuing new bonds with the potential for livelier trading.

As such, the MOF has budgeted NT$1 billion (US$30 million) to compensate prospective government-bond sellers for the interest rate difference between that on paper and the much lower market rates.

Though welcoming such a move, market insiders say that the buyback scale is inadequate but at least a first step in the right direction. They note that to seriously energize government-bond trading, the buyback scale has to be raised to NT$100-200 billion, as well as allowing the issuance of new government bonds at the same scale.

Buyback is Necessary

The buyback, say insiders, is necessary to solve the chronic scarcity of government bonds being traded in the local market, mainly due to the oligopoly controlled by a handful of heavyweight players.

The MOF issues some NT$400-500 billion (US$12-15 billion) of government bonds a year, which, minus the mature bonds, results in a net increase of NT$200 billion (US$6.1 billion). With the market inundated with idle funds, new government bonds are typically snatched up by Chunghwa Post and other leading financial companies looking for secure investments, including banks, insurers and securities firms, which then lock up those bonds in safes. The Central Bank of China (CBC), for instance, auctioned NT$40 billion (US$1.2 billion) in 10-year government bonds on behalf of the national treasury in September 2009, the bulk of which has been bought by leading financial institutions.

The resulting shortage of bonds circulating in the secondary market inevitably hampers trading volume. Consequently, dealers possessing such limited supply of bonds in circulation can manipulate market prices, which fail to reflect the actual picture of the economy.

The limited supply of circulating bonds has pushed up the market prices but driving down the yield rates. Such situation has been exasperated recently by the influx of speculative money, whose owners choose to buy government bonds rather than stocks. Such strategy enables the speculators to cash out from the Taiwan market anytime, after profiting quickly from the appreciating New Taiwan dollar.

Even 10-year government bonds issued in 2009, which boast the highest liquidity and trading volume, cannot escape the fate, with their yield rate dipping to only 1.311% on Oct. 8, the lowest for 10-year bonds since the SARS (severe acute respiratory syndrome) outbreak in June 2003. The yield rate of two-year bonds has neared zero, dropping to 0.067% on Oct. 8, due to being targeted by speculative money, especially when the Financial Supervisory Commission in Taiwan treats bonds with sub-one-year term as liquid assets, which foreign investors are disallowed to buy in sums exceeding 30% of their total assets.