Taiwan Today

The Ministry of Finance is mulling a minimum buyback of NT$20 billion (US$620 million) in government bonds in 2010, according to the ministry’s proposed budget. This is the first time the MOF has initiated a bond buyback program in the country’s history. Sources familiar with the issue pointed out that the move will add supply to the nation’s bond market, increase the market’s liquidity and prevent it from becoming a haven for international hot money pursuing currency speculation. MOF officials said that among the NT$123.9 billion budgeted for bond interest payments, about NT$1 billion will be used to subsidize the difference in interest payments for bond buybacks. Based on this amount, the ministry will be able to buy back treasury securities in the amount of NT$20 billion, the officials said, adding that the exact amount will depend on market operations. The recent attempt by foreign investors to capitalize on the strong movement of the New Taiwan dollar against the U.S. dollar has seen the island’s bond market, given its limited supply, become the best place for currency speculators to park their capital. This has caused both the Central Bank of the Republic of China and the Cabinet-level Financial Supervisory Commission to express grave concern over the capricious volatility of bond prices in the past two weeks. Market analysts see the MOF’s decision as an effective measure against such currency speculation. According to the MOF, the ministry plans to buy back primarily those bonds that are not in popular demand, and as a result, the ministry will be able to offer new bonds. Since new issues tend to have higher liquidity, the move is expected to provide more vitality to the secondary market, at the same time adding no financial burden to the nation’s treasury. The MOF issues new government bonds worth between NT$400 billion and NT$450 billion every year. Subtracting the amount of redemptions at maturity, the balance of government bonds increases at the rate of NT$200 billion per year. However, as most new issues usually end up in the hands of long-term investors such as Chunghwa Post Co. Ltd., banks and life insurance companies, supply in the secondary market has been scarce. Since the MOF’s National Treasury Agency has been reluctant to issue more new bonds in order not to add to the country’s debt burden, over time supply has been unable to meet demand in the island’s treasuries market. Given the limited supply, dealers with stock have been able to control the prices of such bonds, and the distorted prices often fail to reflect the nation’s economic fundamentals. (SFC-THN)