ASIA LOCAL BONDS-Philippine ylds settle at more than 2-mth lows

* Manila may sell $1 bln bond, smaller local supply seen

* March buying in Thai debt set to hit a record since 2009

By Saikat Chatterjee

HONG KONG, March 18 (Reuters) - Philippine local bond yields <0#PHTSY=> consolidated at more than two-month lows on Thursday as investors paused after the biggest rally in more than five months, but dealers said the outlook remained positive.

Benchmark bond yields have fallen by 20 basis points since late February as investors' expectations grew the government may borrow less from the local bond market due to robust tax collections and offshore bond issuances.

It has already raised an estimated 120 billion pesos ($2.6 billion), 40 percent of the full-year target, via offshore sales. It is aiming for a budget deficit of 110.94 billion pesos in the first three months to keep the full-year gap at 293 billion pesos, or 3.5 percent of GDP.

Traders were consolidating positions before treasury bill auctions next week.

President Gloria Macapagal Arroyo has authorised the sale of up to $1 billion worth of retail bonds to Filipinos abroad, the national treasurer said. [ID:nMNB002577].

"Thanks to the successful foreign bond issues, the government has strong cash balances and is comfortable with its funding prospects," DBS said in a note.

"We think the Philippines will probably be able to fund this year's deficit without major difficulties," it said.

The most actively traded four-year bond yield eased 1 basis point to 5.84 percent while six-year bond yields rose by a similiar quantum to 6.95 percent, traders said.

Another factor that is checking a sharp rise in yields are growing market hopes that the central bank will hold off from hiking policy rates until after national elections in May, unlike its regional counterpart in Malaysia which has already begun hiking rates.

That has led to a steepening of the yield curve since end February -- a time when yield curves have flattened elsewhere.

In Thailand, yields backed away from the day's highs due to short-covering by some investors who had cut positions before Wednesday's auctions on concerns that political unrest would sap demand.

Five-year bond yields eased 2 basis points to 3.3 percent.

But the auction was well-received with bid-to-cover ratios at a high 3 times and the yield cutoff range for the bonds at a tight two basis points -- indicators of strong demand despite political uncertainties. BOT14

Thai markets have firmed this week as massive anti-government protests have been largely peaceful and are now showing signs of fizzling out, drawing investors back to assets they see as undervalued compared to the rest of the region.

A jump in foreign investor buying in local bonds have also cheered sentiment with March on track for the biggest month of net purchases since early 2009.

As of March 17, foreign investors have bought nearly 15 billion baht in bonds. They were net sellers in February and bought 3.7 billion baht of debt in January.

Fund managers who managed regional bond funds said most of the incremental buying was coming from fresh inflows into Asia-focused local currency bond funds.

The latest EPFR data for last week showed year-to-date inflows into emerging market bond funds exceeded $5 billion boosted by their biggest weekly inflows of more than $1 billion in a decade. ($1= 45.7 pesos, 32.5 baht) (Editing by Kim Coghill)