Key facts
- Thailand's yield curve is the steepest in emerging Asia, attracting global investors to longer-dated bonds.
- Persistent deflation and a weak economy allow the Bank of Thailand (BOT) to maintain an extended rate pause.
- Thai 10-year bonds stabilized after a sharp sell-off in October, which was the steepest in emerging Asia.
- Foreign investors are underweight Thai debt and are expected to increase purchases, particularly in longer maturities.
- Yields on 30-year Thai bonds fell to their lowest since 2021, while a recent 30-year auction saw high demand.
Thailand's longer-dated government bonds are attracting global investors following a significant sell-off, driven by persistent deflation and expectations of interest-rate cuts from the Bank of Thailand (BOT). The country's yield curve has become the steepest in emerging Asia, a divergence from regional peers that are tightening policy to defend their currencies.
Thai 10-year bonds experienced their sharpest decline in over two years in October, a period when the BOT unexpectedly maintained its policy rate, defying market forecasts for a cut. This rout was exacerbated by concerns over substantial government debt issuance and weaker demand at a recent benchmark bond auction. However, the prospect of future rate reductions, coupled with contained inflation and ample liquidity in the banking system, is now making Thai bonds appear attractive, according to M&G Investments.
"Value emerging at the long-end" of the curve is noted by Peerampa Janjumratsang, a Singapore-based portfolio manager at M&G Investments. She suggests that foreign investors are likely to accumulate Thai government bonds on weakness, as they currently hold an underweight position. Over the past year, Thai bonds have seen net inflows of US$1.7 billion from foreign investors, which is 0.3 standard deviations below the five-year average, indicating potential for further accumulation.
Foreign investors' participation in the October 29th 10-year bond auction was led primarily by offshore investors, despite an overall low bidding gauge. Strategists like Poon Panichpibool from Krung Thai Bank believe foreign investors expect more rate cuts from the BOT due to a bearish economic outlook. Increased foreign purchases could help temper yield increases if the government issues more debt to fund stimulus programs, such as a US$1.4 billion consumption-spurring initiative. Onshore investors, who are overweight local bonds, may be less inclined to buy aggressively at current levels.
Despite the government recently upgrading its growth forecast to 2.4% from 2.2%, investors remain skeptical, with economists surveyed by Bloomberg projecting 2.1% growth this year and 1.8% in 2026. This skepticism is reflected in bond forecasts, with the 10-year Thai yield estimated to fall to 1.4% this quarter, a decrease of about 30 basis points from the current 1.7%. Poon sees the 10-year yield at around 1.7% as fairly valued if the BOT implements one more 25 basis point rate cut.
In contrast to the 10-year bond sale, yields on Thailand's 30-year bonds have fallen to their lowest since 2021, and a recent auction for this tenor drew the highest demand in two years. This robust demand for longer-maturity sovereign bonds comes as investors seek haven assets amid potential US tariffs on Thai exports and domestic political uncertainty. The government's US$115 billion budget bill faces a potential delay if the ruling coalition fails to pass it by end-August, adding to growth concerns. The BOT's accommodative monetary policy is expected to continue supporting Thai bonds.