Foreign investors weigh on bond yields

The effectiveness of the Bank of Thailand’s policy rate in determining long-term bond yields is lessening as foreign investors’ trading activities become a larger factor, says an economic researcher at the central bank’s think tank.

Nonetheless, macroprudential measures may still come in handy for controlling volatility caused by foreign investors, said Jakree Koosakol, senior analyst at the Bank of Thailand.

He cited a study, “Friends or Foes: Foreign Flows in the Thai Government Bond Market”, done in coordination with the Puey Ungphakorn Institute for Economic Research, the Bank of Thailand’s economic think tank.

Mr Jakree said the study found that the factors affecting Thai government yield movements were policy rate expectations, the supply of bonds, sovereign risk factors, exchange rate risks, global monetary conditions reflected in US treasury yields and the trading activity of local and foreign investors.

The study found that for short-term bonds with maturity rates of less than one year, the central bank’s policy rate plays the most important role in determining the yield’s movement, he said.

“For medium and long-term bonds with maturity rates of three to 10 years, trading activities of foreign investors significantly affect the movement of their yields, while that of local investors merely have an i mpact,” said Mr Jakree.

Policy rate expectation, risk factors and US Treasury bond yields also affect the medium to long-term bond yield, albeit to a smaller degree than foreign investors’ trading activity.

He said the reason is because foreign investors have become more active in trading Thai government bonds, with local investors tending to play catch-up.