Arsa Indaravijaya, head of fixed-income investment at Ayudhya Fund Management, said yesterday that although the Bank of Thailand had implemented the capital reserve requirement on December 19, foreign investors were still keeping their money in the debt market.

He said Thailand's domestic rates were on a downward trend, therefore foreign investors are expecting profits from the capital gains on debt instruments. They expect capital gains of at least 10 per cent from the Thai debt market by year-end.

However, it is still uncertain whether they will draw back their money after taking a profit from the market.

Arsa said they had to evaluate several investment factors, notably foreign exchange, total return and interest-rate trends. He cautioned that the Thai debt market was not the most attractive one.

He added that there would be no new capital inflow to invest in the local debt market as long as the country still implements the 30-per-cent withholding measure. It is still uncertain when the authorities will relax or scrap the measure. This has caused new capital to flow to other debt markets, even though Thai interest rates are falling.

Arsa expects that the central bank will reduce its policy rate by another 75 basis points over the course of its next three Monetary Policy Committee meetings. He believes domestic rates will not be in line with rates in the United States, as the bank of Thailand has shifted its stance to focus more on growth rather than inflation as in the past.

He suggested that investors invest in two-year debt instruments, which are expected to generate returns from both coupon rates and capital gains, while the three- and six-month debt instruments are less attractive.

"We won't get a yield as high as 4.5 per cent like we saw last year," Arsa said. "Most fund managers are now turning to invest in long-term debt instruments, reducing the long-term yield close to the short-term yield. Currently, the yield of one-year and one-and-a-half-year instruments has declined lower than the yield of three- and six-month debt instruments. It's not worth investing short term. The most suitable maturity is two years or two-and-a-half years."