Yen deluge bolstering carry trade

Yen deluge bolstering carry trade

Foreigners continue to flock to Thai bonds

The Bank of Japan's unprecedented monetary easing announcement, which sent the yen to a multi-year low against major currencies, has prompted yen-funded carry trade in emerging markets, with Thai bonds expected to remain a sweet spot for such activity.

Carry trade could further boost the baht, the best-performer in Asia this year, while hampering Thai exports, the country's main growth engine.

The Thai bond market has seen carry trade recently and the weaker yen may continue to encourage carry trade, said Thiti Tantikulanan, who heads Kasikornbank's capital markets division.

But he could not pinpoint the size of the yen carry trade, as those who place carry trade bets must borrow yen and convert it to US dollars before reconverting those dollars to Thai baht.

Carry trade involves borrowing in a low-yielding currency to invest in a higher-yielding currency. The yen has been a candidate for funding carry trade positions, given Japan's near-zero interest rates.

The yen carry trade had fallen out of favour after the Lehman Brothers collapse in 2008, as the central banks of major economies adopted super-loose monetary policy by cutting interest rates and pumping money into the system.

The baht on Wednesday briefly hit 28.88 to the US dollar _ its strongest level since being floated in July 1997 _ and the Bank of Japan's latest easing step has been blamed for the currency's renewed strength.

In the market's view, it is only a matter of time before the baht trades regularly beyond the 29 threshold. The local currency has risen 5.4% against the dollar and 18.5% against the yen this year.

Mr Thiti said Thai bonds, short-term paper in particular, could remain the main destination of capital inflows and carry trade as offshore investors park their money in Thai notes.

Foreigners' year-to-date holdings in Thai bonds have risen by about 140 billion baht _ nearly half the full-year gain of 296 billion in 2012 _ to a record high of 850 billion baht, up from 710 billion at the end of last year.

Ariya Tiranaprakij, executive vice-president of the Thai Bond Market Association, acknowledged that foreigners' net purchases of Thai bonds rose sharply to 22.53 billion baht on Friday, April 5, up from 11.31 billion baht two days earlier, after the Bank of Japan's larger-than-expected easing step was announced on April 4.

"But it's too early to say that the new Bank of Japan measures have triggered the higher net purchases by foreigners," she said.

Ms Ariya estimates that foreigners' holding in Thai bonds could hit a fresh record of 1 trillion baht later this year, given that their holding ratio in the Thai bond market is fairly low at 10%, compared with holdings of 30% in Indonesian and Malaysian bonds.

A foreign exchange dealer at a Japanese bank pointed to signs that yen capital inflows to Thailand are increasing. He cited an eagerness to subscribe to the recent initial public offering for the first-of-its-kind BTS infrastructure fund, but he could not say how much money has flowed in response the Bank of Japan's bold moves.

"It is a normal situation that capital is fleeing to better-return markets," he said. "Amid the weakening yen against the baht and Japan's low interest rates, the Thai capital and bond markets offer alternatives to generate both foreign exchange and capital gains."

Prapas Tonpibulsak, chief investment officer of Krungsri Asset Management, said the yen carry trade and other inflows were unlikely to give a significant boost to the Thai bourse, as only a small portion is ploughed into Thai stocks, whose trade is dominated by retail investors.

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