ASIA LOCAL BONDS- Thai yields rise as econ outlook brightens

HONG KONG, Oct 30 (Reuters) - Thai bond yields rose for a third month to one-year peaks on Friday as strong data prompted investors to revise their expectations of when the central bank would start to tighten policy sooner than expected.

VIEWS AND FLOWS

Thai manufacturing output was surprisingly strong in September and along with the central bank's optimistic projections underscored the economy's stead recovery from recession. [ID:nBKK105974].

Five-year bond yields TH5YT=RR climbed 3 basis points to 3.95 percent, its highest since late-October 2008 and ten-year yields TH10YT=RR rose seven basis points to 4.64 percent.

"Apart from the weakness in U.S. Treasuries, the Bank of Thailand's economic forecasts also pushed yields higher," said a Bangkok-based trader.

The central bank forecast on Thursday that the contraction in the economy this year would be slightly smaller than forecast in July while the rebound next year would be slightly bigger at 3.3-5.3 percent. [ID:nBKK546795].

The $260 billion economy was hit by a collapse in exports in late 2008 and this year amid the financial crisis. It emerged from its worst recession in 11 years in the second quarter, growing 2.3 percent from the first.

The central bank has cut rates by 2.50 percentage points between December and April and has kept its interest rate at a record low of 1.25 percent since April.

In Indonesia, bonds were set to fall on the month as foreign fund inflows slowed and investors locked in profits on rising expectations of tighter monetary policy.

Ten-year bond yields ID10YT=RR, though flat on the day, are up 10 basis points on the month but still well below a March peak.

Foreign investors sold a net 94 billion rupiah ($10 million) this week, but their holdings remain at 101.64 trillion rupiah close to the peak of 105 trillion in mid-2007.

CIMB said in a note the data showed foreigners were still confident about rupiah assets even though local investors were starting to lose confidence, which pushed yields higher.

DBS said this month's sell-off did not mark the beginning of a substantial correction as Indonesia was still a favourite among international bond fund managers due to its positive economic and political outlook and high-yielding assets. (Reporting by Saikat Chatterjee; Editing by Jan Dahinten)