Canada's Flat Curve Paves Way for Ultra-Long Bond Sales

(Bloomberg) -- Canada took advantage of its flattening yield curve by selling ultra-long bonds for the second time in three months on Thursday.

The country auctioned C$500 million ($392 million) of 2.75 percent bonds due in December 2064 at an allocation yield of 2.25 percent. The offering by the Bank of Canada, which sells bonds on behalf of the federal government, followed a sale of C$750 million of the same securities on Aug. 29 at a 2.22 percent yield.

Canada’s two consecutive interest rate increases in July and September drove yields on short-term government bonds to a six-year high, making the cost of financing in longer maturities relatively more attractive. The premium investors demand for holding 30-year securities versus two-year notes shrank to the least since 2008 on Wednesday.

“Looking ahead, we anticipate that there will be a possible ultra-long auction date provided in each quarter,” RBC Capital Markets rates strategists led by Mark Chandler wrote in a note. “The smaller size in this week’s auction relative to August does allow for steady ultra-long issuance, while not adding too aggressively to the net issuance of bonds at the long-end.”

The auction was Canada’s fifth such sale, the first three taking place in 2014. The country’s ultra-long debt typically gets priced at levels close to the rate on 30-year fixed-rate bonds, which are sold regularly at auctions, as do its 30-year real return bonds. Ultra-long bond issuance “remains a tactical funding measure and is not part of the regular bond program,” the Bank of Canada said on Sept. 21.

Canada held its most recent 30-year bond auction on Aug. 16, when it sold C$1.2 billion of bonds at a 2.34 percent yield. It auctioned C$3 billion of three-year debt on Wednesday with the yield at 1.55 percent.

©2017 Bloomberg L.P.

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