TAIPEI: Taiwan has auctioned 10-year treasury bonds offering a yield of 1.63 percent, the central bank said yesterday. The yield was lower than expectations as a result of active demand from banks and insurers flush with liquidity.

Bond dealers said they expected no major changes in Taiwan's central bank monetary policy as the economy was still hovering near the bottom, meaning the bank likely would hold its benchmark discount rate at a record low of 1.25 percent later this month.

Dealers added the latest auction likely would put some pressure on the yields of Taiwan's benchmark 10-year bonds in the secondary market, which ended 1.1 basis points down at 1.6335 before the auction result was announced.

"We saw banks and insurance firms buying up the bonds during this auction as the amount of bonds issued won't increase by a huge amount this year," said Baker Tu, manager at Capital Securities.

The Taiwan government has been issuing more debt this year to fund public spending aimed at propping up the recession-hit economy, although the amount of the bonds issued was not as high as earlier market expectations.

Reuters' poll of bond dealers had expected the yield at between 1.65 percent and 1.70 percent. The NT$40 billion ($1.2 billion) worth of bonds will be issued on Thursday.

In a similar auction in March, the central bank sold 10-year bonds at a 1.45 percent yield.

Taiwan's yield curve has been deepening this year after a wave of cuts that brought the island's interest rates to a record low. That has prompted investors to buy up bonds with shorter maturities.

In the secondary market, the yield differential between five- and 20-year bonds widened to 128 basis points from 76 basis points at the beginning of this year.

However, dealers said there was little room for the curve to steepen further as interest rates would remain unchanged for most of this year.

The central bank meet June 25 to review the current rates. The market expects rates to remain unchanged. That would mark the second straight time rates have been held steady after seven consecutive cuts.

"I'm expecting rates to stay unchanged during the central bank's rate-setting meeting later this month," said a bond dealer in Taipei.

"Even though Taiwan's economy is supposed to have bottomed out, we have seen a clear improvement in the latest economic data and the stock market has also been falling quite sharply lately," said the bond dealer.

Reuters

(HK Edition 06/16/2009 page2)