Foreign net holdings in Thai bonds is estimated to hit a fresh record high of 1 trillion baht within this year based on persistent capital inflows, as they are considered a safe haven investment.
Despite the wider gap between the federal funds rate and the Bank of Thailand's one-day repurchase rate, foreign net holdings in Thai bonds year-to-date tally a record 947 billion baht, said Thiti Tantikulanan, head of capital markets business for Kasikornbank (KBank).
Of the total fund inflows, 182 billion baht is in short-dated bonds with maturity of less than one year, with the remaining 765 billion on longer-term notes.
The Bank of Thailand's benchmark rate is 50-75 basis points below the federal funds rate, which is rare, and the spread is expected to widen as the US Federal Reserve hinted at one more rate hike in December to a range of 2.25-2.50%, while most economists forecast its Thai counterpart will stand pat at 1.5% throughout this year.
"However, foreign funds should continue to flow into the Thai bond market as it is considered a safe haven, mainly because of the country's massive current account surplus. The fund flow should slow after the central bank lifts its rate, as expected next year," he said.
Kasikorn Research Center predicts the Bank of Thailand will begin to increase its one-day repurchase rate by a quarter-point in the first quarter next year and another 25 basis points in the second quarter to 2%.
Foreign fund managers will put money into any asset class if they think it offers returns, Mr Thiti said. They hope to cash in on arbitrage from baht appreciation against the US dollar in addition to returns from bond investment, he said.
The baht is the best performer among its Asian peers this year, gaining almost 0.9% so far amid the emerging currency chaos. India's rupee lost 12.4% versus the dollar, the Indonesian rupiah was almost 10% weaker, the Philippines' peso fell some 8%, China's yuan declined around 5% and Malaysia's ringgit weakened 2.32%.
Mr Thiti said the hefty current account surplus has tempted foreign investors to flood into Thai bonds, though the Bank of Thailand has not synchronised its monetary policies with the Fed.
Asian countries can be separated into three groups by offshore fund movement, he said. First, those facing foreign fund outflows and a current account deficit are India and Indonesia, with current account deficits of 1.9% and 1.7% of GDP, respectively. Second are those facing offshore fund outflows despite a current account surplus, such as Taiwan, South Korea and Malaysia.
Lastly, those seeing foreign fund inflows and a current account surplus include Thailand and Singapore.
As of August, Thailand ran a current account surplus of US$23.6 billion or 10.6% of GDP.
The country's real fund flow landscape is considerably changed from before the 1997 Asian financial crisis when Thailand recorded a current account deficit of 20%, Mr Thiti said.
