Thailand’s central bank, the Bank of Thailand (BoT) has cautioned market participants about the risk of a snapback of bond yields. Such event is dangerous as it could cause an increase in borrowing costs for the private sectors which will effectively lower investor confidence.
In the Financial Stability Report 2016 of the BoT, they elaborated on the matter citing how they were paying close attention to the bond market. The report states, “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 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.”
This ongoing erratic movements in capital flows and bond yield prices has been causing problems for companies that depend on short-term bonds. Borrowing costs and debt rollovers are threatening to become more expensive. While it hasn’t happened yet, the risks remain. Thailand’s financial economy will stay strong according to the report but companies whose leverage are high amounts of debt due to cheap borrowing costs might be in danger.
The report emphasizes Thailand’s strong economy stating, “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.”
Another factor for the rise in the price of bond yields is Trump’s impending entrance into office. Investors, out of fear of inflation from Trump’s US-focused policies, had moved their assets towards bond yields. It is the same case for the Thai asset.
The report continues saying, “However, the current financial environment could help ease the interest payment burden of the private sector. Even though the recent Federal Reserve decision to lift its policy rate rate might increase the cost of borrowing, the country’s overall financial costs remain low.”