Government bond markets turned volatile after the U.S. announced reciprocal tariffs.

• Government bond markets in major economies worldwide experienced heightened volatility following the U.S. announcement of reciprocal tariffs and China's retaliatory measures. As a result, the U.S. 10-year Treasury yield rose above 4.50%, reaching its highest level since February 2025.
• Thailand's government bond yields moved broadly in line with U.S. yields, while markets also expect the Monetary Policy Committee (MPC) to cut the policy rate in late April.
• In 2025, Thailand's government bond yields are expected to decline more than previously anticipated, supported by further monetary easing and capital inflows from foreign investors into the bond market.

Global government bond markets were thrown into turmoil after the U.S. raised trade tariffs and China retaliated.

Government bond yields in major economies worldwide have been volatile following the U.S. announcement of reciprocal tariffs and China's retaliatory measures (Figure 1).

U.S. government bond yields initially declined after President Donald Trump announced reciprocal trade tariffs on multiple countries running trade surpluses with the United States. The measures were more aggressive than widely expected and heightened market concerns about the outlook for the U.S. economy.

Meanwhile, the U.S. 10-year Treasury yield fell by around 20 basis points (bps) to approximately 4.00%, but later rebounded to above 4.50% after China raised retaliatory tariffs. The yield has since remained above levels seen prior to President Trump's announcement of import tariffs, standing at 4.23% as of April 28, 2025. At the same time, market attention has shifted back to concerns over rising U.S. inflation, which could prompt the Federal Reserve (Fed) to cut interest rates less than previously expected.

Volatility in U.S. Treasury yields has also spilled over into bond markets in other countries. Japanese government bond yields initially declined sharply before recovering only partially. This reflects the impact of U.S. tariffs on Japan's economy, together with the significant appreciation of the yen in recent periods, which has increased uncertainty over the Bank of Japan's (BOJ) interest rate hike outlook. Meanwhile, German government bond yields fell initially in line with U.S. yields and continued to decline after the European Central Bank (ECB) cut its policy rate by another 25 basis points for the seventh time in the past year, bringing the rate to 2.40%, to cushion downside economic risks that stem from U.S. trade measures.

Thailand's government bond market moved in line with the U.S. market, while investors anticipated a policy rate cut by the Monetary Policy Committee (MPC) in April 2025.

Thai government bond yields moved in the same direction as U.S. yields, while the outlook for Thailand's trade negotiations remains uncertain. The 10-year Thai government bond yield declined to its lowest level of the year at 1.87% (as of April 4, 2025) following the U.S. announcement of higher import tariffs, before rebounding briefly to trade near 2.00% after China introduced retaliatory measures (Figure 2). However, the recovery in Thai yields has been limited, as markets expect the Monetary Policy Committee (MPC) to cut the policy rate by 0.25% at its April 2025 meeting to support the Thai economy amid uncertainty surrounding U.S. import tariff hikes.

However, credit spreads between corporate bonds and government bonds widened for BBB-rated bonds, reflecting rising credit risk in line with expectations that Thailand's economic activity will remain subdued in the period ahead. The average credit spread for BBB-rated corporate bonds with maturities of no more than three years increased to 301 basis points (as of April 25, 2025), up by 18 basis points from 283 basis points (as of April 2, 2025), prior to the U.S. trade tariff hikes (Figure 3).

Thailand's government bond yield is expected to end 2025 below the previous forecast of 2.10%.

In 2025, Thailand's government bond yield is expected to continue declining from its current level of 1.90% (as of April 28, 2025), in line with the prospect of further monetary policy easing and foreign capital inflows into the Thai bond market. However, risk factors that could push yields higher at certain points still need to be monitored.

KResearch sees room for Thailand's government bond yields in 2025 to decline further, driven by the following three factors:

1. The Monetary Policy Committee (MPC) has room to further cut the policy rate. The forward curve reflects market expectations that the MPC will lower interest rates twice this year (including at the April 2025 meeting), in line with Thailand's economic growth outlook, which is expected to be weaker than last year.
2. The Federal Reserve (Fed) may cut interest rates by up to three times this year, as the U.S. faces an increased risk of an economic recession stemming from higher import tariffs. This could lead to further declines in U.S. government bond yields, thereby exerting additional downward pressure on Thai government bond yields over the remainder of the year.
3. Foreign capital inflows could put downward pressure on Thai government bond yields. From the beginning of the year through April 28, 2025, Thailand's bond market recorded net foreign inflows of THB 62.8 billion, compared with net outflows of THB 67.4 billion in 2024. Nearly 85% of these inflows occurred in April, following the U.S. announcement of higher import tariffs.

 
Nevertheless, two key factors that could cause bond yields to rise intermittently, reflecting potential downside risks in the period ahead, will need to be closely monitored.

1. Rising credit risk among lower-rated corporate bonds (BBB and below) amid an economic slowdown could lead to higher corporate bond issuance costs. In a market environment where funding raised through bond issuance falls short of the amount offered, this risk has become more evident. In the first two months of 2025, corporate bond issuance was undersubscribed by about 14% of the initially offered amount (IPO), compared with 10% in the previous year.
2. Thailand's slowing economic outlook, higher borrowing to finance a larger fiscal deficit than last year, and elevated public debt levels—along with the need for prudent and targeted use of borrowed funds—are key variables that warrant close monitoring. These factors could affect future assessments of Thailand's sovereign credit rating, as well as movements in government bond yields and corporate bond funding costs.
   
   

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