ASIA LOCAL BONDS-Philippine yields ease as deficit hopes rise

By Saikat Chatterjee

HONG KONG, Nov 25 - Philippine bond yields slipped on Wednesday as investors bet the government's growing fiscal deficit would stay well within market expectations.

With the central bank expected to continue holding interest rates low well into 2010, despite an uptick in inflation, dealers said bond yields are likely to remain soft in the coming months.

DEFICIT HOPES

Five-year bonds <PH5YT=RR> were yielding 5.98 percent in late trade, a notch lower than 5.99 percent at Tuesday's close, while the 6-year bond yield <PH6YT=RR> was at 6.96 percent, below a previous close of 6.98 percent, traders said.

Volume was 8 billion pesos so far compared to Tuesday's volume of 9.4 billion pesos, Manila-based traders said.

"There has been some follow-through buying on hopes the government will not exceed market forecasts of 2009 deficit and that is keeping bonds biddish," said a local dealer at a bank.

Though the government had forecast a 2009 deficit of 250 billion pesos, Manila shot past that target by October and bond markets and analysts expect a full-year figure of around 300 billion.

Last week Finance Secretary Margarito Teves said the full-year budget deficit would most likely come in at 280 billion pesos if the government can sell sequestered shares of San Miguel Corp <SMC.PS> <SMCB.PS> before year-end. [ID:nMNA002478].

With the government expected to stick with its December auction schedule of 6.5 billion pesos in 1-10 year debt, which would be half of November's total, Manila is looking to target global bonds in January which would lessen supply risks in the domestic market.

Although annual inflation is likely to rise in November, the data will be within the central bank's range, Governor Amando Tetangco said on Wednesday, implying it wasn't concerned for the time being about price pressures building up in the economy. [ID:nMAN529997].

Official data is due next week.

The IMF said monetary tightening in Philippines should come only after the country's economic recovery was on a solid footing. [ID:nMNB002522].

The yield curve <0#PHBMK=> has flattened considerably over the last month with investors buying more longer-maturity bonds.

In neighboring Indonesia, bond yields were largely steady as investors awaited further official direction after policymakers said last week they were studying options to cap foreign holdings in central bank debt. [ID:nJAK483636].

The latest data for the week of Nov. 20 showed foreign investors bought a net 1.6 trillion rupiah of government bonds taking total holdings to 10.49 trillion. 1-year rupiah bond yields <ID1YT=RR> was down nearly 40 bps in same period indicating foreigners stepping up buying government bonds to exploit higher yields ((saikat.chatterjee@thomsonreuters.com; +852-2843-6548; Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))