Thai Bond Sell-off Surges Amid Political Tensions and Rate Worries

[snoop1130]

 

Foreign investors are pulling out of Thai government bonds in droves, driven largely by political instability and the Bank of Thailand's hesitance to further cut interest rates. In a significant move, over US$850 million has been withdrawn this month alone, making it the largest outflow since August last year, as per the Thai Bond Market Association.

 

The stress on the Thai bond market stems from several factors. Political uncertainty looms large, with ongoing probes into the ruling party's alleged ties to former Prime Minister Thaksin Shinawatra. Financial experts suggest that the political climate is likely to deter investment interest for the foreseeable future, especially with the backdrop of the upcoming US presidential elections and speculation around potential trade reprisals.

 

At the heart of investor concern is the Bank of Thailand's reluctance to match last week's unexpected rate cut with further reductions, despite government pressures. This cautious stance leaves the bond market in a precarious position, with yields currently stabilized between 2.3% and 2.4%, according to Krungthai Bank Public Co.

 

The economic milieu is further complicated by the tougher competition Thai bonds face from neighbouring countries. Malaysia's fiscal reforms, for example, are making it an attractive alternative for foreign investors. Coupled with a falling yield gap between Thai bonds and US Treasuries, now at its lowest since May, investors like Abrdn plc are finding more lucrative opportunities elsewhere.

 

For dollar-based investors, returns on Thai bonds have slumped by 3.3% this month. Market forecasts currently reflect a mere 50% chance of another BoT rate cut, constraining the potential for yield improvements in the near term. Despite mounting trade war fears potentially influencing BoT's future policy, experts like Poon Panichpibool predict little room for yields to dip further.

 

In short, the Thai bond market finds itself at a crossroads, grappling with both internal and external pressures. As the situation unfolds, eyes remain fixed on regional stability and the Bank of Thailand's next moves.

 

File photo for reference only

 

-- 2024-10-24

 

 

[Peabody]

What effect does this rate have on the USD/THB exchange rate?