Thailand's long-dated bonds are becoming attractive to foreign investors due to the steepest yield curve in emerging Asia, with some investors seeing them as undervalued. Foreign investors have purchased approximately $342 million in Thai bonds this quarter, partially reversing about $1 billion in net outflows from March. The premium on 10-year Thai bonds over two-year notes is nearly 110 basis points, close to its widest since November 2022. This steepening curve offers greater upside for longer-term debt, with Bloomberg analysis suggesting 10-year yields are roughly 40 basis points above their estimated fair value.
The Bank of Thailand (BOT) is expected to maintain its current interest rate, contrasting with other emerging Asian central banks that are tightening policy. This dovish outlook is supported by slower price pressures and a weak economy in Thailand, with May inflation data undershooting estimates. Economists surveyed by Bloomberg expect the BOT to keep rates unchanged until mid-2027, with Krung Thai Bank strategist Poon Panichpibool forecasting rates to remain at 1% through 2026 and 2027. This stable short-term rate environment makes long-dated bonds more appealing, as Eastspring Investments' fixed income portfolio manager, Rong Ren Goh, noted that the BOT is unlikely to hike rates in the next three to six months.
Despite recent inflows, Thai 10-year bonds appear to have sold off beyond fundamental implications. A Bloomberg regression model, which considers variables like the US 10-year Treasury yield, the Bloomberg Dollar Spot Index, regional equities, and oil prices, indicates that Thai 10-year yields should have risen by about 18 basis points since the Israel-Iran conflict escalated. Instead, yields have jumped nearly 60 basis points, making the bonds approximately 40 basis points cheaper than the model-implied fair value. Poon Panichpibool recommends adding duration in the 10-year tenor and expects the Thai 10-year yield to fall to 2.15% by year-end.
The broader global context of rising US Treasury yields due to the US national debt reaching $40 trillion also impacts Thailand. While Thailand's public debt-to-GDP ratio is a relatively low 64% and largely baht-denominated and domestically held, global benchmark yields still influence its borrowing costs. The widening interest-rate gap between the Federal Reserve and the Bank of Thailand, with the Fed's policy range 250 to 275 basis points above the BOT's 1.00% rate, has exerted pressure on the Thai baht. This dynamic limits the BOT's room to cut rates further without weakening the baht, even as the government seeks to fund stimulus measures through promissory notes and term loans rather than bonds due to rising yields.
