Underwriters of the Philippines' retail bond issue want to increase the issue size beyond a 100 billion peso ($2.2 billion) cap because of strong demand, an issue manager said on Friday.

Bond yields fell to record lows on expectations an increase in the retail bond issue would lead to the government cutting planned market borrowing over the rest of 2010 after it cancelled an 8.5 billion pesos bond auction due next week.

The order book for the retail bond offer had reached 200 billion pesos as of early Friday, double the maximum issue size set by the government, Roberto Juanchito Dispo, executive vice president at First Metro Investment Corp, one of the underwriters, told Reuters.

''Issue managers are collectively asking the BTR (Bureau of Treasury) to provide more supply to the market given the overwhelming demand,'' Dispo said, adding orders were coming from all over the country. ''We are advising the government to upsize.''

The government said it did not want to go overboard with debt issues, even as Manila is set to post a record nominal budget deficit this year of 325 billion pesos, or 3.9 percent of GDP.

''We cannot over-borrow,'' National Treasurer Roberto Tan told Reuters. ''We'll see until what level we can accommodate,'' he said regarding an increase in the retail bond offer.

Benchmark four-year bond yields fell by 3 bps to a record low of 5.12 percent after next week's auction was cancelled. The yield has fallen 40 basis points so far in August and is on course for its biggest monthly drop in 2010.

Trading volume hit a record 86 billion pesos for a single day this week, as local banks and funds flush with liquidity parked their surplus funds in bonds.

Fifty-five billion pesos of retail bonds were sold as of Thursday, and currently a maximum of 10 billion pesos a day can be sold to the public on Friday, Monday and Tuesday, when the offer closes, Dispo said.

Tan said the cap of P100 billion included the P25 billion of the 5-year, 7-year and 10-year bonds sold at a government auction on Tuesday, the ongoing public offer, and over-the-counter sales to state firms.

He has said the government would adjust its market borrowing plan for 2010 based on the retail bond sale.

The government has said it planned to sell 108 billion pesos of bills and bonds locally in the third quarter. (Reuters)