Foreign capital flowing into short-term bonds

As a large amount of capital is flowing into the country, the Thai currency has appreciated and hit its strongest level in 17 months at 29.63 per US dollar on January 21. Foreign capital continues to stream into high-potential markets such as Asia, including Thailand. The stronger baht is caused by foreign investment in short-term bonds and the stock market. The Thai currency has been stronger than regional currencies since the beginning of this year. This raises concern over the policy response to manage capital inflows. Some investors expect the Bank of Thailand to keep the policy rate unchanged at 2.75 per cent in the next Monetary Policy Committee meeting on February 20, but some expect a lower policy rate. The market began to consider the possibility of an interest rate reduction to slow down foreign capital flows and ease upward pressure on the baht after several government offices called for a rate cut.

Last month, most bond yields moved up from the end of last year. Yields of government bonds maturing in less than one year slightly fell in the range of 1-15 basis points due to high demand from domestic and foreign investors for short-term bonds. Trading activities in short-term bonds were concentrated mainly on bonds issued by the Bank of Thailand.

The yields of middle- and long-tenor bonds sharply shifted up about 15bps. Profit-taking in those bonds and higher supply this year, especially of government bonds, are causing yields to rise. Also, yields of Thai longer-term bonds moved in the same direction as US treasury yields, namely north, due to concern over the Fed ending its QE3-4 bond-purchasing programmes. The positive signal from the solving of the fiscal cliff and the move of some investors from the "safe haven" bond market to more risky assets also caused the yield curve of US treasuries to shift up.

Turnover in the secondary bond market last month reached Bt1.96 trillion, or Bt89.2 billion daily on average, increasing 31 per cent from the previous month's average of Bt68.0 billion. More than 68 per cent of average daily trading, or Bt60.23 billion, was in bonds maturing in less than one year, while 32 per cent or Bt28.96 billion was in bonds maturing in more than one year.

The major investors in the bond market were still asset management companies with 56 per cent of turnover and foreign investors with 19 per cent, or Bt234.23 billion. Foreign investors' net buy position was Bt107.80 billion in the month. Foreign investors have been net buyers for 16 months.

Foreign investors' net holding value in Thai bonds at the end of January increased by Bt72.83 billion to Bt783.30 billion from Bt710.46 billion at the end of 2012.

However, for bonds maturing in more than one year, foreign investors were the biggest group with 38 per cent while asset management companies followed with 37 per cent.

Porpit Yodsang, the assistant manager of research and development for the Thai Bond Market Association, can be reached at www.thaibma.or.th, porpit@thaibma.or.th or 02-252-3336 ext 213.