Thai long bonds draw funds with steepest curve in emerging Asia

THAILAND’S yield curve has shifted to the steepest in emerging Asia, with some investors saying that makes its longer-dated bonds look attractive given a divergence in interest-rate expectations there versus regional peers.

While some emerging Asian central banks across are tightening policy to defend currencies against shocks from the Iran war, Thailand’s slower price pressures and a weak economy are allowing its policymakers to remain on an extended rate pause.

Rate expectations for the Bank of Thailand (BOT) are more dovish than those of most regional peers, providing a backdrop that tends to be favourable for long-dated bonds.

Ten-year bonds in Thailand offer a premium of nearly 110 basis points over the nation’s two-year notes, with the gap between the two near the widest since November 2022. This steepening curve offers investors a larger upside for buying longer-term debt, with a Bloomberg analysis indicating 10-year yields are roughly 40 basis points above an estimate of fair value.

Thai bonds at the “long end now offer attractive valuation after a sharp and relatively unusual curve steepening”, said Rong Ren Goh, a fixed income portfolio manager at Eastspring Investments.

Longer-dated bonds present an opportunity as the Bank of Thailand is unlikely to hike rates in the next three to six months “given the country’s weak economic outlook”, he said.

Thailand’s steepening yield curve contrasts with regional peers whose curves are flattening as rate hike expectations drive up short-term rates.

Bank Indonesia surprised the market this week with an off-cycle 25-basis-point rate hike, with some analysts expecting another increase at the upcoming central bank decision next week. The Philippine central bank has raised rates by 25 basis points since the start of the Iran war.

Swaps in India and South Korea are pricing in at least a cumulative 50-basis-point rate hike over the next six months. However, baht swaps have yet to fully factor in a quarter-point rate hike over the same horizon.

SEE ALSO

Thailand sees 2% growth and 3% inflation in 2026, central bank chief says

Thailand’s digital gold mega investors hit by central bank’s rush to control the baht

Thai rate panel warns against broad economic stimulus as war unfolds

Thai economy expands in Q1 but set to slow due to Middle East war

Thai central bank holds key interest rate, as expected

More

That’s because Thailand’s May inflation data undershot estimates, reducing the need for imminent interest rate increases while providing a stable anchor for the front end of the curve. A median of economists surveyed by Bloomberg forecast the BOT to keep rates unchanged until the middle of next year.

“I don’t see any signs of significant second round effects of inflation just yet, and as medium-term inflation expectations should remain well-anchored, the Bank of Thailand is forecast to keep rates unchanged at 1 per cent to 2026 and 2027,” according to Poon Panichpibool, a strategist at Krung Thai Bank.

Foreign investors have purchased about US$342 million of Thai bonds so far this quarter, reversing part of the roughly US$1 billion of net outflows recorded in March. Yields on the nation’s 10-year bonds have retreated from an over one-year high of 2.4 per cent touched last month.

Despite the recent inflows, Thai 10-year bonds appear to have sold off beyond what fundamentals imply.

A Bloomberg regression model uses five years of weekly data to estimate fair value. It weighs variables such as the US 10-year Treasury yield, the Bloomberg Dollar Spot Index, regional equities, and oil prices.

Based on those variables since the Israel-Iran conflict escalated, Thai 10-year yields would be expected to rise by about 18 basis points.

Instead, yields have jumped nearly 60 basis points, leaving the bonds roughly 40 basis points cheaper than the model-implied fair value.

“My recommendation to clients is to add duration in the 10-year tenor as the bond curve is compellingly steep,” Poon said.

He sees the Thai 10-year yield falling to 2.15 per cent by year-end. BLOOMBERG