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Canada Bonds Due in More Than a Decade Yield Less Than Cash

Canadian Bonds Due in More Than a Decade Yielding Less Than Cash

(Bloomberg) -- Investors in Canada’s debt market are becoming more convinced that the next interest-rate move from the country’s central bank will be down, with bonds due in more than a decade now yielding less than cash.

An investor has to be willing to lend for around 14 years to get more than the 1.75 percent rate that the Bank of Canada currently has as its overnight benchmark. While Canadian bonds due in 2033 yielded around 1.8 percent on Thursday, securities maturing in June 2029 offered just 1.68 percent.

Canada Bonds Due in More Than a Decade Yield Less Than Cash

Local yields have fallen in recent weeks amid weakening economic data, a more downbeat assessment from the Bank of Canada and a global rally in bonds. Wednesday’s dovish shift by the Federal Reserve and the market’s more gloomy view on prospects for the U.S. buoyed sovereign bonds and supported the view that policy makers in Ottawa will need to cut rates.

With “the bulk of the curve being below the overnight rate, it really says that the BOC will be reluctantly led to cutting rates,” said Ryan Goulding, a fixed-income manager at Vancouver-based Leith Wheeler Investment Counsel Ltd., which manages around C$19 billion ($14.2 billion). But it may not happen until “after a long, disappointing wait” for capital spending to pick up, he said.

Chances of a rate cut by the BOC’s meeting in September have risen to about 20 percent, from 12 percent a week ago, according to swaps. Traders assign close to a zero percent chance of a hike by then. Canada’s 10-year yields have dropped below the overnight rate for the first time since 2008, when central banks including the BOC were cutting rates to shield their economies from the financial crisis.

Evident Sign

“The yield curve inversion up to 10 years is an evident sign that the BoC is done in its tightening cycle,” said Dominique Lapointe, an economist at Laurentian Bank Securities Inc. “If you consider the consumer’s sensitivity to higher rates, a lack of business investment in recent quarters and weak growth in non-energy exports, despite a buoyant U.S. economy and a respite in trade tensions, this view has some legs.”

There may be a silver lining for companies from the decline in government bond yields: It makes it more attractive for them to tap the market.

On Thursday, Inter Pipeline Ltd., with credit ratings in the lowest tier of investment grade, is seeking to issue C$750 million of hybrid bonds with final maturity in 60 years at a yield of around 6.9 percent. That’s more than triple the yield on Canadian government bonds due in 2064.

To contact the reporter on this story: Esteban Duarte in Toronto at eduarterubia@bloomberg.net

To contact the editors responsible for this story: Christopher DeReza at cdereza1@bloomberg.net, Benjamin Purvis, Mark Tannenbaum

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