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    BOND MARKET: Foreigners likely to stay through 2007


    Foreigners likely to stay through 2007

    Foreign investors are likely to maintain their positions in the Thai bond market to the end of the year despite the central bank's controls on new inflows, according to Ayudhya Fund Management (AYF). Arsa Indaravijaya, head of fixed-income investment at AYF, said foreign investors would stay the course to cash in on the trend of falling market interest rates.

    ''They will generate higher returns up to 10%, mostly from capital gains, if they hold Thai bonds until the year-end,'' he said yesterday.

    However, foreign investors are unlikely to increase their investments in the bond market, given the added costs imposed by the central bank's 30% reserve rule.

    The Bank of Thailand has yet to indicate when the Dec 18 rule will be relaxed. The rule requires new foreign inflows in the bond market to set aside a 30% reserve interest-free with the central bank, with transactions shorter than one year subject to a 10% penalty. Investments prior to Dec 18 are exempt.

    Mr Arsa noted that the local bond market was uncertain as nobody could guarantee what foreign investors plan to do after they take profits later this year.

    Before moving away from Thai bonds, foreigners will likely consider the stronger baht, the trend of interest rates in Thailand and neighboring countries and the overall economic situation.

    ''From the perspective of foreign investors, when they make new investments, Thai bonds are not particularly attractive when compared to the other countries.''

    This year, AYF predicts that the local benchmark interest rate will be reduced by three times, or 75 basis points. The trend will not hinge on the US Federal Reserve's decisions.

    The central bank will likely put more importance on stimulating local economic activity than taming inflation as in the past two years. At the same time, global oil prices have stabilised and are likely to fall further.
    Mr Arsa suggested investors put money in bonds with mid-term durations up to two years. Short-term bonds with three- or six-month durations are less attractive.

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