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22 Jan 2021

Econ Digest

Which direction are Thai bond yields going?

         A new outbreak of COVID-19 that tends to become more severe has made it necessary for the authorities of many countries to urgently launch additional measures in order to help those affected and limit the risks that may occur to overall economic recovery. A clear example is that the US has released new stimulus packages worth USD1.9 trillion or about 9% of GDP. Thailand has also announced its “We Win” Scheme, one of the latest measures to help reduce public cost of living. 

         In terms of the money market and the capital market, the bond market is one of the financial markets (in addition to the stock market) that is sensitive to news regarding the money injected to stimulate the economy, while the additional spending may cause the government to borrow money from various sources, including bond issuance. As a result, the government’s need to raise funds through bond issuance will cause the volume of bonds in the market to increase and will push government bond yields (which is the government’s cost of borrowing) to rise gradually. Besides the amount of bonds, factors that may affect the direction of bond yields include policy interest rate trends or monetary policy signals from central banks and/or other factors that have a positive effect on the economy such as progress in the development of vaccines and the direction of inflation. 

         Although it has been observed that the 10-year US treasury bond yield gradually rises to a level above 1.00% (supported by the news regarding vaccines at the end of 2020 and an additional boost earlier this year from hopes for President Joe Biden’s massive stimulus packages), it shall be admitted that the current level of US bond yields has not returned to that of the pre-COVID-19 period yet. Going forward, the direction of bond yields still depends on various variables, in particular, the progress of the US economic stimulus packages, the COVID-19 pandemic control and vaccines development as well as signs of the recovery of the labor market and the US economy as a whole. It is expected that US bond yields will continue to rise if the pandemic recedes.  

         ​The direction of US bond yields is one of the key factors affecting the movement of Thai bond yields, and it is expected that Thailand’s medium to long term bond yields will gradually increase in line with the direction of foreign bond markets. Although the policy interest rate of the US and Thailand will likely stabilize at the current level throughout the year of 2021, the issue that must be monitored is the borrowing costs of the public and private sectors for over 1 year long-term borrowing that is likely to have bottomed out and will gradually move higher. 

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