The Thai bond market has been highly volatile in recent weeks, especially the 10-year government bond, whose yields rose by about 0.9 basis points in September, roiled by the US's potential debt default.
Investors expect the local government bond supply to increase from the fourth quarter this year after the public debt ceiling was raised from 60% to 70%. This is one factor causing a rise in 10-year government bond yields.
Ariya Tiranaprakit, deputy managing director of the Thai Bond Market Association (TBMA), said another factor affecting the Thai bond market over the past two months is the Federal Reserve's imminent tapering of its asset purchases by the end of this year and interest rate hike early next year.
She said the news caused short-term outflows from Thai long-term bonds as foreign investors tried to reduce their risk and channel their funds back to the dollar index when the interest rate is expected to rise.
Ms Ariya said about 45 billion baht of foreign funds flowed out of the local bond market in September.
The market has recorded net inflow of around 65 billion baht year-to-date.
She said the US 10-year government bond yield is a benchmark in the global bond market, so whenever there is news regarding its movements, yield returns in the Thai bond market will also fluctuate.
The local 10-year government bond yield peaked at around 2% in March this year amid rising concerns about the US inflation rate and an interest rate hike, said Ms Ariya. However, the yield then dropped to the normal range of 1% to 1.5% after a temporary rise in inflation.
A new market concern is the unusual prospect of a US debt default. She said this is a political problem that requires cooperation from both parties to vote for a higher debt ceiling, allowing the government to borrow more money to pay off debts and stimulate the economy.
Investors should monitor the Republican Party's reactions to negotiations, she said.
"This is not the first time the US government faced a debt ceiling deadline, and the bond market fluctuated every time it occurred," Ms Ariya said. "I believe the US government can solve the problem because if it defaults on its debts, it will affect the world capital market."
She suggested investors monitor the Thai government's issuance of bonds, which is expected to increase after the public debt ceiling expansion, which will also cause bond yields to rise.
"We believe market demand is high and can support increased bond supply because commercial bank deposits total 16 trillion baht and monetary liquidity remains elevated," said Ms Ariya.