Thai long bonds are drawing significant foreign investor interest, accumulating $342 million in purchases this quarter, which has helped reverse a $1 billion outflow observed in March. This interest is largely due to Thailand's yield curve being the steepest in emerging Asia, with a premium of nearly 110 basis points for 10-year bonds over two-year notes, making longer-term debt particularly attractive. This steep curve is seen as an opportunity for investors, with some analysts like Poon Panichpibool at Krung Thai Bank recommending adding duration in the 10-year tenor, predicting a fall in the 10-year yield to 2.15% by year-end.
Despite the recent inflows, the Thai 10-year bonds were considered oversold, trading about 40 basis points above their estimated fair value according to a Bloomberg regression model. This model factors in variables such as the US 10-year Treasury yield, the Bloomberg Dollar Spot Index, regional equities, and oil prices. Experts like Rong Ren Goh, a fixed income portfolio manager at Eastspring Investments, highlight the attractive valuation of Thai bonds at the long end after a sharp and somewhat unusual curve steepening.
The Bank of Thailand's dovish stance on interest rates, driven by a weak economic outlook and lower-than-expected inflation in May, further supports the appeal of long-dated bonds. The central bank is expected to keep rates unchanged until mid-2027, providing a stable environment for the front end of the curve. This contrasts with other emerging Asian central banks that are tightening policy to combat inflation and currency shocks, making Thailand an outlier and a favorable destination for long-term bond investments.
Foreign investors have shown confidence in Thai government bonds, with their average maturity increasing to around 8.5 years from 8.1 years at the end of last year. While foreign ownership of Thai government bonds is relatively small at 5.2% of total market capitalization ($947 billion), compared to double-digit shares in countries like Indonesia, the recent inflows of approximately $2 billion underscore renewed international interest. However, the market has experienced volatility, with significant capital movements oscillating throughout the year, influenced by external macroeconomic shocks and concerns about potential hawkish moves by the US Federal Reserve.
