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The pressure on global fixed income appears to be acceler¬ating against the backdrop of more bullish recovery expectations.

During such times, safe haven investments tend to be shunned while risky assets come into vogue.

Global equities, proxied by the MSCI World Index, have risen 47 per cent off their lows in March, while foreign investors are piling into regional equities and taking Asian currencies along for the ride.

The US yield curve was steepen¬ing most of last month with the 2-10 spread (the difference between 10year and twoyear yields) up from 224 basis points to the current level of 272 basis points.

In conjunction with the econom¬icturnaround optimism, the market might be running ahead of itself by pricing in increased demand for commodities, whereby we have seen light sweet crude doubling within the course of only a few months.

A question which has not been raised yet is whether the phenome¬non we are now seeing is a "selfful¬filling prophecy" or "a selfdefeating prophecy".

There is increased talk of "bond vigilantes", which potential¬ly derail policymakers' efforts to put the US econo¬my back on the recovery track.

This is offsetting the pos¬itive effects of the US Fed's quantitative easing medi¬cine. During Bill Clinton's administration, bond vigi¬lantes heavily sold off bonds to rebel against stimulus packages funded by the issuance of more US government bonds.

In the here and now, the market is estimating the federal deficit to reach 12.2 per cent of 2009 GDP and 8.95 per cent of 2010 GDP, which is likely to push the level of federal debt to 100 per cent of GDP, making bond investors very nervous indeed.

With the US economy still showing only "green shoots", that is, in the early stages of recovery, rising bond yields can pose a setback for the housing market and throw the recovery in reverse gear.

Crude oil near US$70 doesn't help either and potentially could rekindle inflation expectations towards the upside. For Asia, the runup in their currencies presents problems for the exportdependent economy.

For local bonds, the market will be paying attention to the Constitution Court's verdict giving either a green or red light for the government to borrow Bt400 bil¬lion.

Should the emergency decree run aground, Thai bonds could breathe a short sigh of relief.

Unfortunately many variables remain stacked up against this asset class.

The Bank of Thailand's pause on the policy rate signals a bottoming out of the easing cycle, especially as northbound oil prices raise inflation expectations.

The strong baht has been more a foe than a friend for growth, where¬by we estimate that the baht is cur¬rently 4.4 per cent over its longterm tradeweighted average.

With limitations on monetary policy tools, the burden for resusci¬tating the economy rests with expan¬sionary fiscal policy.

While political friction might erect hurdles to the pursuit of such objectives, it is an eventuality that will keep the steepening bias of the Thai yield curve as is.

Kobsidthi Silpachai is the head of market and economic research for the capital markets business of Kasikornbank