The Thai Bond Market Association (Thai BMA) yesterday said foreign investors' trading volume last month dropped to 3 per cent from the usual 12 per cent.

However, the Bank of Thailand's 25-basis-point decrease in its policy rate to 4.75 per cent and its recent bond issues helped lift the market out of the doldrums.

Had the BOT not eased its capital-control measure further, foreign investors would likely have shifted their money to other countries, the association said.

"The measure is still creating negative investment sentiment. However, overall the tension is not as high as it was in late December," said Nattapol Chavalitcheevin, president of the Thai BMA.

The bond market reacted immediately to the BOT's introduction of the 30-per-cent reserve requirement on foreign capital on December 19, with the yield curve of bonds of all maturities rising by 30 basis points in a single day.

"The measure affected not only the yield curve and the value of the market, but also the debenture issues planned by the private sector," said Nattapol.

He added that the daily average trading volume of foreign investors dropped to just Bt800 million after the measure was announced, compared to about Bt3 billion earlier.

Following the 25-basis-point cut in the BOT's policy rate, the yield curves of all bonds have returned to normal levels. The yields of short-term bonds are once more dependent to the repurchase rate, while the yields of long-term bonds have slid back to even lower than before the capital-control measure was announced.

The 10-year bond yield declined almost 70 basis points to 4.75 per cent from 5.44 per cent at the end of 2006. The longest bond maturity - the 19-year yield - fell 85 basis points to 5.05 per cent.

However, the BOT's recent twice-weekly bond issues, put up for auction at Bt35 billion per issue, has helped boost the market.

"The trading value was up by Bt3 billion per day in January. In December, the average daily trading volume was Bt33.7 billion. It improved to Bt36.5 billion last month. However, 65 per cent of the total trading was in short-term bonds with maturity of less than one year," Nattapol said.

Foreign investors' trading value on the bond market in January was Bt22 billion, or Bt1.1 billion per day, accounting for only 3 per cent of the total trade, he added.