MANILA/HONG KONG - Philippine local bond yields eased on Monday as expectations rose that government would not make a last minute rush to tap the local debt market and raise more funds to meet its swelling fiscal deficit.

With liquidity abundant in the domestic markets and the central bank unlikely to raise rates in the near term, there is a case for buying peso-denominated bonds, dealers said.

Five-year bonds were yielding 6.25%, down from 6.275% on Friday and seven-year yields were at 7.04%, down from 7.08%.

Even though Manila has breached its full-year deficit targets in the first 10 months of the year, traders said the full-year numbers were likely to be within market estimates for a record P300 billion ($6.4 billion).

Dealers said the government is expected to stick with its December auction schedule of P6.5 billion in 1-10 year debt, which would be half of November's total.

With Manila also looking to target global bonds in January, the market had no immediate uncertainties over supply, dealers said.

"At the same time, there will be no more peso bond offering on the liquid benchmark bonds actively traded by the market," said a local trader.

"With the high liquidity in the market, it looks like everybody will be scrambling for bonds and nobody is willing to sell at this point," he added.

The government, one of Asia's largest sovereign debt issuers, needs to raise about $2 billion to cover its foreign debt requirements for 2010, when its budget deficit is expected to hit P233.4 billion.

It sold $1 billion in 25-year global bonds in October, with some of the proceeds to fund its 2010 debt needs.

Central bank data shows funds parked in the central bank special deposit scheme, an indicator of excess liquidity, was P610 billion in the week ended October 30 and near a record high of P700 billion in 2008, traders said.

The curve has also flattened with the spreads between 7-yr and one-year bonds down to a five-month low of 244 basis points compared to 293 basis points at end-October.

Volume recorded in the first hour of trade was at P2.4 billion compared to P13.9 billion on Friday.

Central bank Governor Amando Tetangco said last week there was enough leeway to continue an easy monetary policy with no urgency to implement an exit strategy despite a possible uptick in inflation.

On the radar this week is September quarter GDP data which may show economic expansion has slowed from the second quarter amid a cautious economic outlook, a Reuters poll showed.