Thailand’s bond slump seen deepening as inflation concerns mount
The nation is particularly exposed to energy shocks, with more than half of its oil imports sourced from the Middle East
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THAILAND’S sovereign bonds, which have been among the world’s worst performers since the Iran war erupted, face more losses as rising inflation risks add to worries over fiscal strain, analysts say.
Local-currency Thai bonds have lost 4.1 per cent since the end of February, the most after the UK among 29 global markets tracked by Bloomberg. The yield on Thailand’s 10-year notes has surged 52 basis points in March, the biggest jump since September 2022.
Consumer prices, which stayed negative last month due to base effects, are expected to turn positive “significantly” in the second quarter, a top government official said this week.
He cited rising prices of oil, some farm products and meat, as well as higher air transport and production costs.
That suggests that the impact of the global oil shock triggered by the war is expected to hit the energy-reliant economy with a lag.
While the US and Iran agreed to a two-week ceasefire, uncertainty over its implementation remains high. Analysts expect oil prices to stay elevated due to the severe damage the Middle East conflict has caused to the region’s energy assets.
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“Long-term yields have risen recently but are still underpricing” inflation and fiscal risks, said Kobsidthi Silpachai, head of capital market research at Kasikornbank in Bangkok.
He forecast the 10-year yield to rise to 2.5 per cent by year-end, versus on Wednesday’s (Apr 8) close of 2 per cent. A move towards 2.8 per cent is possible if pressures persist, he added.
The Iran war has changed the course for Thailand’s bond market. The nation is particularly exposed to energy shocks, with more than half of its oil imports sourced from the Middle East.
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Beyond inflation, the conflict has also reignited concern over public finances as the government seeks to cushion the impact of the sharpest increase in diesel and petrol prices in decades on consumers.
Planned measures include cutting fuel excise taxes, boosting stipends for welfare card holders and offering fuel subsidies to selected business groups.
Expanding energy subsidies are likely to push public debt higher, said Kobsidthi. Public debt stands at about 66 per cent of gross domestic product, official data showed; this is close to the government’s 70 per cent ceiling.
Amid these concerns, global funds turned sellers of Thai bonds in March on a net basis.
Before the war, yields slumped in February amid foreign inflows, an unexpected rate cut and a decisive election victory for Prime Minister Anutin Charnvirakul, which bolstered hopes of policy continuity and stronger growth.
Investors are keeping a close eye on Thailand’s oil fund, which helps subsidise fuel prices during spikes. The fund posted a deficit of 53 billion baht (S$2.1 billion) in the week ended Apr 5, up from 42 billion baht a week earlier, according to the energy ministry’s website.
Thailand is considering additional borrowing specifically for the fuel subsidy fund, the government said in mid-March.
While risk assets staged a relief rally on Wednesday, market watchers said they need confirmation that the ceasefire will last and energy flows through the Strait of Hormuz will normalise.
Oil prices rebounded on Thursday as the Strait of Hormuz remained largely blocked and Israeli attacks on Lebanon threatened to derail the fragile ceasefire.
The worst-case scenario for Thai bonds would be if markets start pricing in a tighter policy framework from the US Federal Reserve and the Bank of Thailand alongside concerns over additional bond supply, said Poon Panichpibool, a strategist at Krung Thai Bank.
The 10-year yield could rise to as high as 2.5 per cent at the end of the second quarter in such a situation, he said. BLOOMBERG
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