The effects of foreign capital flow on the Thai bond market
DURING THE global economic slowdown caused by the widespread impact of the US financial crisis in 2008, many countries attempted to stimulate their economies by injecting money into their financial systems.
As a result, a large amount of foreign capital flowed into emerging countries, including Thailand. These funds flowing into the Thai bond market led the non-resident (NR) net holding to increase continuously from Bt66 billion at the end of 2009 to a peak level of Bt870 billion in April last year.
Nevertheless, with growing concerns over the United States scaling down its economic-stimulus package and emerging political tensions in Thailand at that time, these factors led to uncertainty on investment returns. That resulted in foreign funds flowing out of the Thai bond market, causing the foreign net holding to decrease until it stood at Bt640 billion at the end of May this year.
However, after the National Council for Peace and Order declared its road map to stimulate the economy, foreign investors seemed to have more confidence in Thailand’s economic and political stability, and became net buyers again in the bond market, which in turn contributed to a higher NR net holding.
As of September 26, foreign investors’ bond holdings stood at Bt709 billion, divided into: Bt605 billion of government bonds (17 per cent of total government bonds’ outstanding value); Bt104 billion of Bank of Thailand bonds (4 per cent of central-bank bonds’ outstanding value); and Bt0.69 billion of corporate bonds (0.03 per cent of all corporate bonds’ outstanding value).
In addition to this, when considering past foreign-capital flows by term, it can be seen that foreign funds continuously flowed into long-term bonds, while the foreign investment in short-term bonds was relatively volatile.
Similarly, when taking into account the type of bonds, foreign investors were consistent net buyers of government bonds, whose terms are mostly longer than one year, whereas there was both buying and selling of Bank of Thailand bonds – which are mostly short-term instruments – in a changeable market.
The rapid change of capital flows affects the Thai bond market, as can be seen from the impact on bond yields and prices.
Specifically, with a large amount of capital inflow, government bond prices will increase (decline in yield). Conversely, when there is foreign-capital outflow, such as during rising concerns over tapering of quantitative easing in the US and political tension in Thailand, prices will fall (rise in yield).
So if investors expect there to be a further capital inflow, buying bonds now to make a profit when the prices increase later is deemed to be an interesting investment alternative.
On the other hand, if there is a situation that tends to result in a capital outflow, there will be another opportunity to buy bonds at a lower price, particularly for long-term investors.
However, investors who buy bonds at a low price (high yield) and hold them until maturity will not only be unaffected by price changes due to the movement of fund flows, but will also receive better returns than other investment types with similar risk levels, such as deposits.
As mentioned above, it can be concluded that investors who understand and can predict the direction of capital flow will be able to enhance their return on bond investment constantly and safely.
That said, apart from this issue, there will always be other internal and external factors impacting movements of bond prices (yields) and the investment environment in the Thai bond market, which investors need to concern themselves about and follow closely.
Porpit Yodsang is manager of the research and development department, Thai Bond Market Association, and can be reached at [email protected] or (02) 252 3336 Ext 213.
