So many institutions have been selling or buying baht bonds to avoid currency controls that the Bank of Thailand has had to step in and buy its own debt to stabilise the market and to help steady its currency in recent days, dealers say. Thailand's onshore secondary government bond market is a good tool for foreign exchange trading because it is fairly liquid and usually relatively stable.

The Thai central bank keeps a tight rein on currency trading, limiting forex transactions by non-resident parties to just 50 million baht ($1.14 million) each. But dealers say institutional investors are free to move larger amounts of money in and out of the Thai currency by selling baht-denominated assets including bonds in the domestic market. The same rules are supposed to apply to Thai bonds as to forex but the regulations are more difficult to impose, dealers say. The activities of currency traders in recent weeks have been enough to cause wild fluctuations in Thai debt yields.

"The bond market crashed last Friday after hefty selling following the sharp fall of the baht. Most players switched from the bond market to foreign exchange markets. That caused some fund outflow," said a bond analyst at a foreign brokerage firm. Dealers said the Thai secondary debt yield curve has been volatile in recent weeks due to the gloomy outlook for the baht, which has slipped to 28-month lows this week near 44 per dollar.

Bond yields rose sharply last week, especially on Friday, when the baht slumped to 43.65 to the dollar, leading to a tightening of baht liquidity after selling of the Thai unit. Bonds yields move in inverse proportion to bond prices, so as dealers sold Thai debt, prices fell, but yields rose.