The Philippines will offer at least P40 billion of new bonds in exchange for existing debt to cut financing costs and broaden the market.

The government will sell bonds due 2014 and 2016 in exchange for debt maturing from February 2009 to January 2016, the Bureau of the Treasury said in a statement yesterday. Having more five-year and seven-year securities will ensure ?credible benchmarks for corporate issuances,? Treasurer Roberto Tan said.

Bonds rallied as investors bought debt to become eligible for the exchange, betting the government will have to offer a premium to prevailing yields for the swap to succeed. Yields on five-year debt have dropped to the lowest in almost a year as cooling inflation and an economic slump prompted the central bank to lower interest rates in December for the first time in 11 months.

?The timing for them is perfect,? said Raoul Santos, who helps manage P50 billion at Rizal Commercial Banking Corp. ?They?ll be able to restructure debt at longer tenors and lower rates.?

Tan said the bond swap being arranged by Credit Suisse was a continuation of the government?s domestic debt consolidation program following the historic and successful exchanges that started in 2006.

?We have been receiving continuous feedback from the financial industry and participants have expressed a keen desire to see improved and sustained liquidity in Philippine peso benchmarks. Liquid benchmarks on the whole augur well for the market given the current levels of overall domestic liquidity,? Tan said.

The Philippines swapped P165 billion worth of eligible bonds into new three-, five-, seven-, and 10-year benchmark bonds worth P180 billion in 2006 and exchanged P97.5 billion worth of new three- and five-year benchmark bonds with P88.6 billion worth of old debt papers in 2007.

?All of those transactions have enhanced the liquidity of the domestic bond market and have encouraged increased investments in peso-denominated Philippine government securities,? Tan said.

He said the government plans to issue at least P20 billion worth of five-year benchmark bonds and P20 billion worth of seven-year bonds.

Investors could swap their existing debt papers due Feb. 1 this year and Jan. 27, 2014 worth about P1.025 trillion with new five- or seven-year benchmark bonds. Holders of securities maturing between Jan. 27, 2014 and Jan. 27, 2016 worth P120 billion could exchange them with new seven-year bonds.

Tan said the terms of the exchange would be determined by a separate auction for each series running from Jan. 19 to Jan. 22. Lawrence Agcaoili and Bloomberg