Taiwan sells 10-year T-bonds at high yield

TAIPEI, Sept 7 (Reuters) - Taiwan auctioned T$40 billion (US$1.2 billion) in 10-year government bonds at a yield of 1.7380 percent, the central bank on Wednesday, higher than market forecasts as demand was weaker than expected.

A Reuters poll of bond dealers had forecast the yield to be between 1.7030 percent and 1.7340 percent.

"Some investors covered their short positions in the benchmark 10-year bonds earlier in the day, resulting in slack demand in the auctioned bonds," said a bond dealer.

On Wednesday, Taiwan's benchmark 10-year bond ended 1.321 percent lower at 1.7032 percent, compared with levels around 1.7655 percent at the end of August.

"The yield of the benchmark bond fell more than expected in early trade as inflation worries eased, which triggered some short-covering later in the session," said another dealer.

On Monday, Taiwan said its consumer price index (CPI) for August had been 3.56 percent higher than a year earlier, showing unexpectedly high inflation, though the core price rise was mild at 0.7 percent.

Yields of Taiwan's 10-year bonds have been declining over the past few weeks, tracking U.S. treasuries, which have generally fallen on concerns over the effect of Hurricane Katrina on the U.S. economy.

Bidding in the auction amounted to T$55 billion, or 1.38 times the size of the issue, with bids ranging between 1.5000 and 1.7380 percent, the central bank said in a statement.

Securities firms took up the largest part of the issue, 36.64 percent, while bills financing companies bought 32.97 percent and the rest was purchased by banking sector and trust firms, the central bank said.

In the last 10-year treasury bond auction, in June, Taiwan sold T$40 billion of the government bonds at a yield of 1.8900 percent, which was also higher than market forecasts.

The government, which is facing a seventh straight annual fiscal deficit in 2006 with a T$195.7 billion budget shortfall, usually issues T$400 billion to T$500 billion of treasuries each year. It sold T$465 billion treasury bonds last year. (US$1=T$32.7)

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