ASIA LOCAL BONDS- Philippine yields rise on budget gap fears

HONG KONG, May 29 (Reuters) - Philippine bond yields rose on Friday, with investors spooked by the prospect of a ballooning deficit after the economy shrank more than forecast, raising fears of weaker revenue and higher spending, traders said.

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VIEWS AND FLOWS

The economy shrank a seasonally adjusted 2.3 percent in the first quarter from the previous three months, much worse than forecast, prompting the central bank to cut rates on Thursday to a 17-year low and urge the government to accelerate spending to avert a recession. [ID:nMNA000245]

"Everybody was surprised by the GDP figures. Now the government will have to accelerate spending, which will result in more debt issuance," said Alex Macapagal, first vice president at Land Bank of the Philippines.

"The prospect of more supply of government bonds is causing the market to push the yields up."

The yield on the five-year bond PH5YT=RR, the most actively traded security, climbed by as much as 5 bps to 5.98 percent this morning and was last traded at 5.96 percent, traders said. Volume of trade was at 9 billion pesos ($189.5 million) by late afternoon, versus 14.8 billion for the whole of Friday.

The market is now speculating that the deficit may soar to 250 billion pesos this year, higher than the government's 199.2 billion peso estimate, a Manila-based trader said.

Yields have been rising since Monday after the country's finance chief said the state may have to increase its 2009 budget deficit estimate.

MALAYSIAN YIELDS DOWN

Malaysian bond yields were lower, with the benchmark five-year bond MY5YT=RR down 7 bps to 3.57 percent, on bargain-hunting after a recent selloff, traders said.

"There is still some value on the five-year bond," the trader said. "Even at 3.5 percent, it's still attractive."

The five-year bond yield rose to 3.9 percent recently, as investors dumped the debt on supply concerns.

(Reporting by Jun Ebias; Editing by Kim Coghill)