Thailand long-bond outlook darkens on fiscal worries before vote

[MELBOURNE] As Thailand’s general election nears, rising concerns about fiscal largesse are adding pressure on longer-dated bonds, spurring bets for sustained underperformance versus short-term notes.

The spread between the nation’s two-year and 10-year yield has widened by about 50 basis points over four months, reaching its highest level since November 2023 this week, on bets for heavy government debt issuance to fund stimulus.

Expectations are building for the curve to steepen further, with auction demand for long bonds showing signs of cooling. Meanwhile, shorter-dated securities are finding support from the anticipation of more interest-rate cuts.

A rise in long-end bond yields compounds problems for any party that comes to power, as it increases financing costs and narrows the fiscal space to drive policies needed to support Thailand’s economic growth.

South-east Asia’s second-biggest economy has been beset by the impact of US reciprocal tariffs, severe flooding in the southern provinces and deadly border clashes with Cambodia, with the baht’s surge making matters worse by hurting its key export and tourism sectors.

“We could see a further steepening in the Thai sovereign bond curve, especially ahead of the elections, which may spell more debt-funded fiscal stimulus,” said Kobsidthi Silpachai, head of capital market research at Kasikornbank in Bangkok.

The spread can widen to as much as 80 basis points in the run-up to the Feb 8 election, he added. It is about 58 currently, data compiled by Bloomberg show.

“If fiscal deficit spending gets out of hand, there’s a rising risk of a credit rating downgrade,” Kobsidthi added. He also flagged the possibility of a 25-basis point rate reduction in February.

Demand for longer-dated Thai bonds has cooled at recent primary auctions. A sale of 2045 securities on Jan 7 saw a bid-to-cover ratio of 1.67 times, lower than the average for the previous six auctions of that tenor. That’s after demand at a Dec 24 sale of bonds due 2077 fell to the lowest since 2022.

Meanwhile, Bank of Thailand governor Vitai Ratanakorn said on Tuesday (Jan 13) that there was room to cut rates further, adding however that monetary policy has limitations in fixing the country’s structural problems.

Election risks aside, investors have already been bracing for additional debt issuance, with some expectations of it being front-loaded.

“There is scope for additional steepening” of the yield curve, given there’s a significant amount of longer-dated Thai bond issuance coming up, said Peerampa Janjumratsang, a portfolio manager for fixed income at M&G Investments in Singapore.

The finance ministry may also bring forward its semi-annual bond switching exercise, conducted to extend its maturity profile, to the first quarter of 2026, she added. BLOOMBERG