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Senior vice president Thiti Tantikulanan said tax privileges on government and Bank of Thailand bonds discouraged demand for corporate bonds from local and foreign investors.

If the distortion were removed, the demand from long-term investors would increase, resulting in bond market development, said Thiti, Kasikornbank's business head for capital markets.

The authorities gave tax privileges for savings-bond holders by providing an additional 10-15 per cent on top of the government bond yield curve in order to compensate for the savers' tax burdens. But they did not provide any subsidy for corporate bond investors, he said.

"Corporate bonds are being taken advantage of, particularly when they are with the same maturity, issued at the same time. This brings about a distortion between the two markets," said Thiti.

He said the corporate bond market was also discouraged by the tax holiday for foreign investors putting money in government bonds.

Foreign investors are currently granted waivers from 15-per-cent tax for interest income, capital gains and discounts they obtain from investing in government bonds.

"The current limited pool of in-

vestors becomes worse when foreign investors do not enter the corporate bond market," he said.

Moreover, the Securities and Exchange Commission's regulation that does not allow insurance companies and mutual funds to put the money into lower than BBB-rated bonds has put off issuance of high-yield bonds, said Thiti.

"It is not a bad policy, but the BBB corporate bond market is currently limited although many companies could take such credit-rated bonds," he said.

Kasikornbank views the country's bond market as

not yet diverse, as it consists of 91 per cent of straight bonds, 6 per cent of securitisation bonds and 3 per cent of others.

Thiti said the trading of government bonds in the secondary market was

not ideal and trading of corporate bonds was inactive. Institutional investors

usually buy and hold the bonds, indicating their purpose as being long-term savings with a certain return, which causes inactive trading in the secondary market.

However, the Finance Ministry's Public Debt Management Office, the Bank of Thailand and Thai Bond Market Association have tried to boost liquidity in the market by reducing the maturity of the bonds.

Thiti projected the government bond's yield curve would be steeper due to high supply in the market. The government plans to issue Bt280 billion in fiscal year 2008 and Bt400 billion in 2009. This will lead to a higher cost of financing for the issuers next year.