Foreign stimulus policies affect bond market; baht 'less volatile' in Feb

The economic stimulus policies launched by many countries in the past couple of years have led to global imbalances. For example, the quantitative easing of the United States and the outright monetary transactions (OMT) of the euro zone have caused capital flows into some countries (especially emerging markets) that have high returns on investment, and Thailand is one of the countries affected.

Since January, a large amount of capital inflow to Thailand has driven the baht to its strongest level in 17 months.

Investors in Thai financial markets had forecast that the Bank of Thailand might cut its policy rate to slow down these flows of foreign capital and ease the effect on the baht.

However, at its meeting on February 20, the BOT's Monetary Policy Committee (MPC) kept the rate unchanged at 2.75 per cent, noting that this was the suitable level to drive Thailand's economy efficiently.

Besides, cutting interest rates could lead to an economic bubble that would possibly attract more capital inflows, and Thailand could face financial-stability risks as a result of accelerating asset prices and high household debt.

Nevertheless, the MPC added that it would closely monitor the capital-inflow situation and stand ready to take any action as appropriate.

As it turned out, the concerns over strengthening of the baht have been somewhat diminished, reflected by a less volatile movement of the currency in February compared with the previous month. As for movements in the Thai financial market, foreign investors continued to be net buyers of Bt81 billion in the bond market (Bt63.2 billion in short-term bonds and Bt17.8 billion in long-term bonds). Meanwhile, they were net sellers of Bt17.4 billion in the stock market.

The decision to keep the policy rate unchanged has led the Thai bond yield curve to move in a narrow band and shift down along the curve in the range of minus-2 to minus-8 basis points. Most trading activities concentrated on short-term bonds issued by the central bank.

Turnover in the secondary bond market reached Bt1.9 trillion, or a daily average of Bt102.3 billion, increasing 14.71 per cent from the previous month (daily average Bt89.2 billion in January).

More than 62 per cent of daily average trading value or Bt54.41billion was in short-term bonds (less than one-year maturity), while another 38 |per cent or Bt33.4 billion was |in bonds with more than one-year maturity (long-term |bonds).

The major investors in the Thai bond market were still asset-management companies, which participated in 54 per cent of total trading value, and foreign investors, who captured 20 per cent or Bt253.9 billion.

At the end of February, foreign investors' bond holding stood at Bt806.8 billion, accounting for 9.33 per cent of the total bond market's outstanding value, increasing from Bt710.5 billion at the end of December.

Next month, there will be many interesting factors that investors both in the stock market and the bond market need to be concerned about.

These include the discussions on fiscal budget cuts in the United States, the political problems in Italy that have caused a sharp upwards shift in Italian bond yields, and |concerns about a "currency war" whereby several countries try to distort and weaken their own currencies.

All of these factors may have some effect on the investment environment, and investors will have to follow up continuously.

PORPIT YODSANG is assistant manager of the research and development department, Thai Bond Market Association (www.thaibma.or.th). He can be reached at porpit@thaibma.or.th, or 02-252-3336 Ext 213.