The Bank of Thailand has warned that a snapback of bond yields could raise the private sector's borrowing costs and dampen investor confidence.
"Looking ahead, a risk that requires close monitoring is the effect of the sudden increase in bond yields or the yield snapback on the bond market, which could cause fluctuations in the financial market and capital flow and could, in turn, affect the cost of borrowing and confidence of investors at large," said the Bank of Thailand's latest Financial Stability Report 2016.
The wild ride of capital flow and the sudden rise in bond yields could affect the cost of borrowing and debt rollover of companies that are highly dependent on short-term bonds, as well as large thrift and credit cooperatives that have deep connections with the financial system, the report said.
Although the overall financial status of the business sector remains sound, risk remains for some big companies that leverage high amounts of debt because of the low cost of borrowing after the financial crisis, the central bank said.
The report said the median debt-to-equity ratio of companies of 1.2 is considered stable at a high level, making these companies more careful about doing business amid the uneven economic recovery and the risk of the bond yield snapback.
Since Donald Trump won the race for the White House in November, Thai bond yields, like those of other countries, have surged as investors bet that the incoming US president's inward-oriented policies would fuel inflation and that rate hikes would be required to curb price pressure.
"However, the current financial environment could help ease the interest payment burden of the private sector," the report said. "Even though the recent Federal Reserve decision to lift its policy rate might increase the cost of borrowing, the country's overall financial costs remain low."
The report reiterated that Thailand's financial stability remains solid.
"In 2016, the country's overall financial stability remained sound, reflected in the strong financial position of large companies and financial institutions' loan-loss provisions and capital," the report said.
Financial institutions' high loan-loss provisions and capital were able to cope with risks associated with deteriorating loan quality caused by the slow economic recovery, especially that of small and medium-sized enterprises, low-income households and agricultural households, the report said.
In the medium term, the effect of the bond yield snapback on commercial banks is expected to be limited, as most of the bonds held by banks are short- and medium-term maturities.
"Bond holding [of banks] also accounts for a small portion of banks' capital reserves, so the effects of a change in bond yields were limited," the report said.