The Thai bond market has seen $7.3 billion in inflows this year, the biggest of any Asian market, according to BNP Paribas, and analysts expect the trend to continue as interest rates are set to remain low and the baht is appreciating with no sign of intervention.
The bond market saw a record single-day inflow of 28 billion baht ($946 million) on Tuesday, some 26 billion baht of which went into debt maturing in more than one year, according to the Thai Bond Market Association. A 40 billion baht, 15-year, inflation-linked bond that was sold this month received orders of 120 billion baht. Foreigners accounted for 60 percent of the demand.
Thailand and other Asian countries have seen a wave of hot money inflows this year following monetary easing in developed countries, although signs of improvement in the US economy have sparked fears that funds could start to return home. However, some analysts think such fears are premature, and that the US Federal Reserve's quantitative easing (QE) and, eventually, similar moves from the Bank of Japan (BoJ) will underpin the Thai bond market.
"We expect steady inflows because QE stays and there's also BoJ liquidity coming. The Bank of Thailand seems to be showing they are willing to let the market mechanism work," said Nalin Chutchotitham, senior market researcher at Kasikornbank. "Thai bonds still offer attractive gains and the Bank of Thailand is not in a hurry to raise its policy rate," she added.
The inflows helped push the baht to a 28-month high this week. Bank of Thailand Governor Prasarn Trairatvorakul said on Wednesday that was not a worry and that it was driven by the country's strong economy. The currency's strength - and the absence of any official moves to hold it down - has in turn encouraged foreigners to buy more bonds. The baht has risen about 3.5 percent against the dollar this year, making it Asia's best-performing currency.
The central bank left its policy rate on hold at 2.75 percent last month and may find it difficult to tighten because of government pressure for easier policy. "Bond inflows will continue unless inflation ticks significantly higher, which is unlikely in our view. The risk at the moment is aggressive capital controls but even this is unlikely at this juncture," said HSBC strategist Pin Ru Tan. Kris Na Songkhla, a fund manager at Krung Thai Asset Management, said foreign inflows may slow.
Thai bonds had become more expensive, while the better economic news from the United States had led some investors to move away from relatively safe government debt. "So some money is going to riskier assets - it's not going back to the United States, just to other assets in the country," said Kris, who helps manage about $12.5 billion in assets.
Thai government bond yields have fallen since late September, fuelled by a surprise interest rate cut in October, with two-year yields down by 32 basis points to 2.88 percent and five-year yields by 27 bps to 3.16 percent. Foreign ownership of Thai government bonds remains low compared with levels elsewhere in Southeast Asia, according to BNP Paribas. It said foreigners own about 16.5 percent of such bonds in Thailand, compared with nearly 30 percent in Malaysia and 33 percent in Indonesia.