UPDATE 2-Strong Manila bond sale eases borrowing concerns

* Record sale of over 100 bln pesos seen for retail bonds

* Treasury's retail bond auction over 2.8 times subscribed

* Debt yields fall after bond auction (Adds amounts bid at auction)

MANILA, Sept 15 - The Philippines sold 25 billion pesos of government retail bonds on Tuesday in an auction to banks that drew bids for 2.8 times the amount offered, pushing down yields and easing concerns over the government's borrowing requirements.

Manila faces a record deficit this year of 250 billion pesos, or 3.2 percent of GDP, as a result of stimulus spending. More retail bond sales would offset the need to raise debt in the wholesale market, which has reeled at the prospect of the government's borrowing requirement.

Juanchito Dispo, executive vice president at arranger First Metro Investment Corp, said the Treasury should take advantage of the demand for retail bonds.

"This will give the government the ability to fine-tune their borrowings for the remainder of the year and even up to the first quarter of next year," he said.

"Raise a sizable amount now so that they will be insulated from interest rate pressure.

"We see inflation moving up and the BSP (central bank) has already paused in their interest rate cutting, so there is pressure for rates to move up," Dispo said.

Total demand for the 3-, 5-, and 7-year retail bonds could reach a record of more than 100 billion pesos ($2.1 billion), but it is unclear how much the Treasury will accept, Dispo said.

More of the securities will be sold to small investors in a public offer that will last until next Tuesday.

Philippine bond yields fell across the curve after the auction resulted in lower-than-expected rates.

"There is a lot of liquidity that's now trying to find its way into the higher-yielding investments at the longer end of the curve," said Mike Garcia, first vice president and trust officer at Union Bank of the Philippines.

ADJUST

National Treasurer Roberto Tan had said Manila would adjust its yet-to-be disclosed local borrowing plan in the fourth quarter depending on the proceeds from the retail bond sale.

Manila has set a local borrowing plan of 451.7 billion pesos this year to finance its budget deficit.

As of Sept. 9, the government had sold 209.676 billion pesos worth of bills and bonds via regular auctions so far this year, based on Reuters calculations. It also sells the same securities to government firms via an over-the-counter window.

Banks and other investors offered to buy 70 billion pesos ($1.45 billion) of the retail bonds compared with the total of 25 billion pesos on offer.

Ten billion pesos in 3-year bonds fetched a coupon rate of 5.25 percent, lower than 5.3750 percent in the secondary market for the same tenor. But the arrangers of the bond sale and government officials said the coupon rates were "acceptable."

Ten billion pesos in 5-year paper fetched 6.25 percent and the five billion pesos in 7-year bonds fetched 7.0 percent, also below prevailing secondary market rates.

Eduardo Mendiola, the government's deputy treasurer, told Reuters last week the retail bond sale was likely to reach more than 80 billion pesos.

Manila raised 70 billion pesos at its last sale of retail T-bonds in July 2008. It sold a total 77.7 billion pesos of the bonds to small investors in August 2007.

Aside from First Metro, other arrangers of the issue are BPI Capital Corp, BDO Capital, Rizal Commercial Banking Corp, Metropolitan Bank & Trust Co, Land Bank of the Philippines and Development Bank of the Philippines. ($1 = 48.335 pesos)