Bond mart wants foreign money back

Liquidity needed for long-term issues

DARANA CHUDASRI

The Thai bond market, while benefiting from growing expectations of interest rate cuts over the next few months, will stay under pressure if foreign investors remain locked out of the market due to the Bank of Thailand's reserve rule.

Hopes that the central bank would ease the Dec 18 reserve rule for fixed-income investors have faded in recent weeks. While regulators have maintained that the 30% rule is a temporary measure and greater ''flexibility'' would be shown for certain transactions, the controls are likely to remain in place for at least the next several months until greater stability is in the baht's exchange rate.

Although the reserve rule has helped stabilise the baht at around 35.7 to the dollar, benefiting exporters, the capital market continues to fret about the impact the rule has had on foreign investment.

Ariya Tiranaprakij, a senior vice-president with the Thai Bond Market Association, said market participants remained hopeful that the capital controls would be eased shortly, which would result in an overall boost in liquidity by removing obstacles for foreign investors.

At the same time, she noted, bond yields have mostly recovered after spiking sharply in late last year in reaction to the Dec 18 rule. Daily trading volume has also changed little over the past several months at an average of around 20 billion baht.

Three-year bond yields yesterday were quoted at 4.55799%, with the five-year yield at 4.5907% and the seven-year bond at 4.64331%.

''Costs for issuers right now are quite attractive. The only factor to watch really is whether the central bank will ease the reserve rule,'' Ms Ariya said.

She said that if the reserve rule stayed in place for a significant amount of time, it could affect funding plans for issuers.

Heavy bond issues by the Bank of Thailand itself, mostly focused on the shorter end of the curve, have helped shift market demand to shorter-dated instruments. ''While many believe that domestic liquidity is sufficient to meet demand, there is no denying that foreign investors help market liquidity, particularly for longer bonds,'' Ms Ariya said.

She noted that when looking at the bond dealer tables, Thai banks lead the market overall. But if counting only bonds traded with maturities of one year and up, foreign banks are the major players, including Standard Chartered (Thai) and Deutsche Bank.

''The figures show that non-resident funds do help boost turnover in the longer-end of the market, while the shorter money market is mostly driven by Thai institutions,'' Ms Ariya said.

Tak Bunnag, an executive vice-president at Bank of Ayudhya, said it was unlikely that the central bank would further adjust its reserve rule until more economic data came through.

As a result, the exchange rate would likely continue to trade in a tight range so long as the overall policy remained.

Bangkok Post
Sunday February 11, 2007