They often cite Thailand's sovereign bond as the clearest example of a security now disconnected from its rightful place in the credit universe.

"The Thailand 2007 yankee bond was trading at 158 basis points (bps) over U.S. Treasuries, which is comparable with Hong Kong or China, which is crazy," David Fernandez, head of Asian sovereign credit research at JP Morgan, said.

The Kingdom of Thailand is rated at the bottom of the investment grade bracket at Baa3/BBB- by Moody's and Standard & Poor's. The Special Administrative Region of Hong Kong is rated A3/A+ and the People's Republic of China is rated A3/BBB.

The Mass Transit Railway Corp's (MTRC) 2009 eurobond, a popular proxy for Hong Kong sovereign risk, was quoted at the end of last week at 149 bps above the benchmark. The People's Republic of China 2008 dollar Eurobond closed at 140 bps over U.S. Treasuries.

South Korea's benchmark 2008 dollar eurobond, rated one notch higher than Thailand by both rating agencies at Baa2/BBB, on the other hand, yields a spread of 201 basis points.

BLAME IT ON DEFAULT SWAPS

The fact that Thai sovereign paper trades a little rich to its peers is often put down to supply and demand-- dollar-denominated sovereign Thai risk is relatively scarce.

"It's not new either, scarcity has been an issue for the Thai sovereign bond market for as long as I've been in the market," said a U.S. bank strategist based in Singapore.

Aside from the $600 million that is outstanding on its 2007 yankee bond, Thailand has another $300 million maturing in just under a year's time. It also has two medium-term notes totalling $90 million which mature in 2003 and 2013.

But some traders say there is another factor -- Asia's burgeoning credit derivatives market which it is creating an artifical bid and tightening credit spreads.

"There's good liquidity all along the curve for Thai sovereign default swaps. We've got default swaps in one, in three, and in five years," a Singapore-based trader at a U.S. bank said.

Default swaps are insurance type products allowing investors to adjust exposures to the risk of default or other event on a bond or loan.

Because Thai sovereign paper is scarce, this is "helping fill out the Thai bond curve," the trader said. In other words, investors are trading Thai sovereign risk using the default swaps market rather than the underlying security.

By taking to this market with gusto and aggressively selling credit protection in shorter maturities banks have, at once, seen their offers come in.

However, the lower default swap price quotes don't entirely explain the underlying bond spread disparity.

As one London-based trader pointed out, the South Korean default swaps curve is trading closer to Thailand's default swaps curve than the respective underlying bond markets.

The indicative price from broker CreditTrade for five year default swaps on Thai sovereign debt was 110/120 bps on Tuesday. For South Korea the market was 105/120.

Since the cost of credit protection for Thai debt was not as low as the spread yielded by the underlying bond, relative to South Korea, it is hard to see how one explained the other, the trader said.

HOLDING BACK NEW ISSUANCE?

The extent to which technical factors may be holding back potential new debt issuance is also a question.

While secondary market spreads may give the two month-old Thai government a false idea of its likely borrowing costs were it to seek to tap international bond markets for fresh funding, and hinder negotiations with potential underwriters, officials of the ruling Thai Rak Thai have played down talk of new foreign issuance.

Prime Minister Thaksin Shinawatra's election campaign was big on expansive fiscal pledges, if a little vague, but he was clear about his intention not to issue external debt, JP Morgan's Fernandez said.

"We'll avoid as much as possible new foreign borrowing," Thaksin said in January.

Falling local interest rates have also encouraged Thai borrowers to continue refinancing foreign debt with local debt, placing the Asian crisis of 1997 even further behind them. Thailand's ratio of debt repayments to export earnings declined to 15.4 percent at the end of 2000 from 19.4 percent at end-1999. Total debts fell to $15.4 billion over the same period to $82.25 billion.

Thailand borrowed $14.3 billion from a $17.2 billion rescue package in 1997 and began paying it back last year.