The Finance Ministry must be prepared for a new exodus of foreigners from the Thai bond market once the US Federal Reserve starts normalising its interest rate, even using Treasury reserves if capital outflows accelerate.
The warning by the Thai Bond Market Association (TBMA) seeks to ensure that policymakers do not panic if the situation crops up, and to prevent it spreading to the banking system.
A US rate hike would prompt foreign investors to swiftly cash out of the bond market and the yield curve would then increase, TBMA president Tada Phutthitada said, adding that the abrupt rise in the yield curve would deliver losses to mutual funds and insurers with bond exposure.
Treasury reserves and the 400-billion-baht demand for government bonds should be a sufficient cushion against potential capital outflows, he said.
At the end of February, Treasury reserves stood at 183 billion baht.
Tada: Outflows likely if yield gap narrows
Given that the gap between the US 10-year treasury bond yield and the comparable Thai government bond's yield will narrow when the Fed hikes its rate, capital outflows will probably emerge, Mr Tada said.
The gap between the US 10-year treasury bond's yield and the 10-year Thai government bond's yield is about one percentage point.
Offshore investors still hold a combined 625 billion baht in long-term Thai government bonds.
In the first quarter, foreign investors yanked 7.18 billion baht out of the bond market, nearly all of it from short-term bonds.
Mr Tada expects the Fed to keep its rate at a rock-bottom level for an extended period as it waits to see whether the strong-dollar trend will continue.
In another development, the amount of new corporate bond issuance in the three months to March tumbled 37% on the same period last year to 82.4 billion baht.
The number of corporate bond issuers jumped by 40% to 43 in the period, but seven of them were new issuers, indicating that more small and medium-sized companies were raising funds through the primary debt market.
Thai bonds outstanding during the January-March quarter edged up 0.8% from a year earlier to 9.36 trillion baht.