(Bloomberg) -- Thai bonds, the biggest loser among Southeast Asian peers, are set to extend their slump as rising inflationary pressures and the risk of a hawkish pivot by the so far accommodative local central bank weigh on the debt.

This week’s hike in local fuel prices will further buoy the nation’s inflation print that topped economists’ forecasts for three straight months. Traders have been pricing in more hawkish expectations for the Bank of Thailand, with the two-year non-deliverable interest rate swap premium over the policy rate widening to 122 basis points, the highest in more than a decade.


Stronger-than-expected inflation prints across emerging Asia this year have already built up market expectations of a more hawkish stance by the accommodative central banks in the region. An index of emerging-Asia bonds has already clocked losses of over 5% this year.

“Market participants are signaling that they don’t believe that the Bank of Thailand will maintain the policy rate at 0.5% this year, with the two-year Thai yield signaling that the first quarter-percentage-point hike should arrive in the second half,” said Poon Panichpibool, a strategist at Krung Thai Bank Pcl in Bangkok. 

Thai bonds clocked losses of 10.5% this year, the lowest total returns relative to peers in Southeast Asia.

Even as March inflation jumped to 5.73%, a 13-year high, the Thai central bank governor reiterated last month that its monetary policy could look through short-term volatility in inflation with medium-term inflation expectations remain anchored within 1-3%. While economists expect April CPI, to be released Thursday, to drop to 4.81%, this respite may be short-lived as retail diesel prices have been raised from May 1.  

READ: Thai Inflation Spike May Tilt Odds in Favor of Early Rate Hikes

The two-year non-deliverable interest rate swap premium over the policy rate has scope to widen even further ahead of a rate hike cycle, suggesting further inflation surprises may lead to more hawkish pricing, dragging down the bonds. 

The spread previously widened to 189 basis points in June 2009 ahead of a rate hike cycle, a period marked by sizable gains in inflation, with the pace of price gains rising for six straight months to peak at 4.10% in January 2010.


©2022 Bloomberg L.P.