ASIA LOCAL BONDS-Long Philippine yields rise on supply concerns

By Karen Lema and Saikat Chatterjee

MANILA/HONG KONG, July 19 (Reuters) - Longer-dated Philippine bond yields edged higher on Monday as investors cut some of their holdings in anticipation of heavy supply in coming weeks.

The new administration set a 2010 budget deficit target of 325 billion pesos ($7 billion), about 8 percent above a previous forecast and plans to fund the additional shortfall by domestic borrowing and assets sales.

The new deficit target is a record in peso terms and was unveiled barely three weeks after the previous government increased its budget deficit forecast.

Benchmark four-year bond yields rose two basis points to 5.47 percent and moved further away from record lows of 5.40 percent hit last week.

In a first test of the market's demand, the government will auction seven-year treasury bonds worth 8.5 billion pesos on Tuesday.













One reason bond investors are worried about the widening fiscal gap is the new administration's intention to borrow more domestically than in offshore markets.

The Philippines is Asia's largest sovereign issuer of foreign currency debt and taps the global bond market each year to fund its budget shortfall.

The previous government, whose term ended on June 30, sold $2.5 billion of foreign-currency bonds early in 2010.

New Finance Secretary Cesar Purisima said last week the government wanted to borrow more in the domestic market to limit exposure to foreign exchange fluctuations..

'There is negative overhang from the resurgence of deficit concerns and supply issues as the government has reduced its target revenue from asset sales and Secretary Purisima has been quite vocal on probable plans on additional peso borrowings,' said one Manila-based trader.

The yield curve steepened slightly over the past two weeks with 7-12 year yields rising by 3-4 basis points while one-year yields fell by more than 20 bps after the central bank suggested rates would remain low well into next year.

At a review last week, the central bank cut its inflation forecasts for 2010 and 2011 and kept its key interest rate at a record low..

(Editing by Chris Lewis and Tomasz Janowski)

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