The Bank of Thailand plans to gradually move away from its year-long tapering of new short-term bond supply by raising the new weekly three- and six-month debt auction amounts by 5 billion baht each, starting from May 15.
The move to increase bond supply comes after the central bank found that foreign investors' appetite for short-dated debt has whittled down, said Vachira Arromdee, the central bank's assistant governor overseeing the financial markets operations group.
From May 15, the new three- and six-month bond supply will be increased to 35 billion baht each per week, and the new short-dated debt amount for the following months will be determined based on market liquidity, local investor demand and the government's overall short-term debt to let the market make a gradual adjustment.
The Bank of Thailand began cutting its new weekly supply of three- and six-month bonds by 10 billion baht each in April of last year, from 40 billion baht of each type issued weekly in March, constituting a total supply reduction of 80 billion baht in one month.
The measure sought to curb the baht's strength after the local currency emerged as the best-performing currency in Asia, by shifting fund flows into long-term bonds and away from shorter-term debt notes.
Foreign investors have demanded less short-dated debt, and the continuous low returns of the bonds resulting from limited supply could have an impact on the search-for-yield behaviour of local investors and periodically create a side effect in the money market, Ms Vachira said.
"The Bank of Thailand's larger bond supply does not send any signals or reflect the Monetary Policy Committee's views," she said. "The central bank continues to closely monitor foreign exchange circumstances and examine transactions that could be speculative activities. Moreover, the central bank is ready to review enforced measures if the situation changes."
Earlier this month, Thai Bond Market Association (TBMA) president Tada Phutthitada said net foreign inflows into Thai bonds stood at 38.7 billion baht in the first quarter as foreign investors continued to be net buyers from the end of last year of 223 billion baht.
Outstanding value of foreign holdings stood at 871.66 billion baht, or 7-8% of total outstanding Thai bond value, with most foreigners investing in government bonds.
The baht has gained 3.1% against the greenback so far this year and is Asia's second-best-performing currency after the Malaysian ringgit, up 3.2%.
Meanwhile, Bank of Thailand governor Veerathai Santiprabhob said foreign capital flowed out of Thai equity and bond markets last week, mainly due to the normalisation of monetary policy in advanced economies, led by the US Federal Reserve.
"The situation isn't worrisome," Mr Veerathai said.
Local business operators should pay more attention to the upward cycle of interest rates and liquidity amid the monetary policy normalisation, he said, adding that the balancing structure between local and foreign debt is a key point to manage financial costs.
With liquidity in the local market, fund mobilisation from both the public and private sectors is not a matter of concern, the governor said, given accelerating domestic investment. Funding costs in the local market are still lower than in the past several years, he noted.
April 23-26, foreign investors were net sellers of 18.7 billion baht in Thai bonds, according to TBMA data.