Thai bonds have been outperforming other Asian markets, with net foreign inflows reaching approximately $342 million this quarter, partially recovering from about $1 billion in net outflows in March. The 10-year Thai bond yields have decreased from 2.4% last month, now hovering between 2.1% and 2.2%, yet remain about 40 basis points cheaper than their model-implied fair value.
The attractive valuation is largely due to Thailand's steep yield curve, the steepest in emerging Asia. The premium on 10-year bonds over two-year notes is nearly 110 basis points, approaching its widest gap since November 2022. This steepness is drawing investors seeking higher returns on longer-term debt, especially since the Bank of Thailand is expected to maintain its policy rate due to a weak economic outlook and low inflation, unlike some regional central banks that are tightening policies.
Foreign investors have shown confidence, increasing their average bond maturity holdings to about 8.5 years from 8.1 years by the end of last year. Despite some recent volatility and capital flight, overall foreign holdings in Thai bonds stand at roughly 950 billion baht. Analysts, such as Poon Panichpibool from Krung Thai Bank, recommend adding duration in the 10-year tenor, forecasting the 10-year yield to fall to 2.15% by year-end, while Eastspring Investments' Rong Ren Goh also highlights the attractive valuation of longer-dated bonds.
The dovish stance of the Bank of Thailand, which is expected to keep rates unchanged until mid-2027, provides a favorable environment for long-dated bonds. This is supported by slower price pressures and a weak economy, reducing the immediate need for interest rate increases. However, the domestic market is grappling with a distorted yield curve, with aggressive short-term positioning depressing near-term yields and selling pressure on long-term securities pushing yields higher, posing a challenge for corporations issuing long-term debentures.
