Capital inflows boost bond market
Hot money is flowing into the Thai and other Asian bond markets as foreign investors seek to benefit from relatively high interest rates and foreign-exchange gains.The level of outstanding foreign bond-holding in the Thai market has hit Bt720 billion, 30 per cent of which is invested in short-term bonds. Foreign holdings account for 17 per cent of total bond value.
Outstanding bond value stood at Bt8.58 trillion at the end of last year, up 21 per cent from a year earlier. Foreign bond-holding in 2012 increased 69 per cent from the previous year, according to the Thai Bond Market Association.
On Monday and Tuesday alone, foreign investors injected another Bt10 billion into the market.
"Whenever the baht appreciates, foreign funds are flowing to short-term bonds, indicating their speculation on foreign-exchange rates. Short-term bonds, with maturity of 14 to 30 days, now generate returns at 2.75 per cent compared to the US fed-funds rate of 0.25 per cent. That represents a big differential," Niwat Kanjanaphoomin, president of the association, said yesterday.
Investment in short-term bonds carries small risk and, aside from higher returns, they become more attractive when the currencies in host countries appreciate, he explained.
The baht has strengthened sharply from 30.70 per US dollar at the end of last year to 29.90 yesterday.
Niwat said it remained to be seen how long inflows to the bond market would continue, as it depended on economic fundamentals and foreign-exchange rates.
"Certainly, in the short term, the inflows will be huge. But in the long term, many factors must be factored in. For now, no major development is anticipated.
"It seems the US is not rushing on injecting liquidity under QE3 [quantitative easing] and QE4 rounds while the euro crisis is gaining momentum," he said.
The association chief added that foreign bond inflows to the Thai bond market were in line with the regional trend.
Compared to the previous year, extra bond investment in 2012 increased slightly. During the year, net foreign bond holding rose by about Bt280 billion from the 2011 level, or by some Bt23 billion per month on average.
Following the implementation of ultra-loose monetary policy in major industrial countries, Thailand has enjoyed increasing portfolio flows into its stock and fixed-income markets in recent years.
Average foreign daily turnover in the Stock Exchange of Thailand rose significantly to Bt7.5 billion during just the first 10 months of last year, compared to Bt6.7 billion in 2011, Bt5.35 billion in 2010 and Bt3.55 billion in 2009.
Significant growth in foreign participation boosted the SET Index last year, helping to propel it to a record high since the Asian financial crisis in 1997.
However, the phenomenon of capital inflow is not exclusive in Thailand.
HSBC's emerging-market debt strategists expect some rebalancing away from US dollar debt and towards higher-beta local-currency debt.
This should mean that flows into local bond markets continue. Indeed, recent fund-flow statistics have supported this view.
Some countries could see a particular boost from sovereign ratings upgrades. The Philippines may be chief amongst these, given that it could move to investment-grade status.
With other countries such as South Korea also potentially in line for such a rerating, Asia's bond markets may see relatively strong inflows from the broadly upward ratings path, said the HSBC economists.
This is supported by continued growth in Asia, compared to developed markets. China, South Korea, the Philippines and Thailand are all seen boosting growth via fiscal stimulus in the coming months. Unlike countries in the Group of 10, fiscal deficits and debt levels remain well within acceptable ranges and extra spending should not be a concern to the market, or to rating agencies.
Indonesia has been upgraded to investment grade by both Moody's and Fitch, and Standard & Poor's Ratings Services is expected to follow suit this year.
Looking through 2013, ongoing strong fundamentals could actually result in a sovereign upgrade in certain countries.
On the monetary side, HSBC economists forecast some gradual rate hikes in Asia. These are only seen starting in the second quarter at the earliest, with the majority of the hikes pencilled in for the second half.
Also, the amount of rate hikes is expected to be marginal, as low real interest rates should continue to support any economic recovery.
In its "Global Focus - 2013" report, Standard Chartered Bank expects the Bank of Thailand to cut rates by another 25 basis points to 2.5 per cent this year, which would sustain downward pressure on the yields of bonds with maturity of one to five years.
On the supply front, the Public Debt Management Office has indicated that gross supply of local bonds will rise to Bt651 billion this year, from Bt540 billion in 2012.