Ontario sells C$750 million add-on; government bonds rally on unrest, iffy rate shift

By Cristal Cody

Prospect News, Feb. 23 - In new supply in the Canadian bond market on Wednesday, the Province of Ontario sold C$750 million in a reopening of its 4% notes due June 2, 2021, sources said.

"Provincial spreads have been coming in," one source said.

In other new bonds, Canada sold C$400 million 1.5% inflation-linked real return bonds due 2044 to yield 1.34%.

Canadian government bonds rallied early in the day as a "continuation of the safe-haven rally we saw yesterday," said Fergal Smith, managing market strategist at Action Economics in Toronto.

Investors "rotated out of risk assets into core sovereign debt markets," he said. "The curve is flattened considerably," noting that the spread between two- and 10-year government securities narrowed 5 basis points on the day.

Canada's 10-year bond yield fell to 3.326% from 3.38%. The two-year bond yield dropped to 1.798% from 1.81%.

"The bout of geopolitical developments and the spike in crude oil have highlighted the risk that global growth could be derailed, and that's not going to be lost on the Bank of Canada," Smith said. "That's one of the reasons Canada has rallied as strong as it had. The risk may be shifting away from the bank staying sidelined if the current volatility in the markets continues."

The Bank of Canada next meets to announce any changes to the current 1% overnight rate on March 1.

Treasuries did not fare as well, widening in the two-year to 10-year spread on a bond sell-off Wednesday after weak bidding in the auction of five-year debt.

The two-year note yield rose 5 bps to 0.74%, and the 10-year benchmark note yield rose 2 bps to 3.48%. The 30-year bond made small gains on Wednesday, sending the yield down 2 bps to 4.58%.

The Treasury auctioned $35 billion of five-year notes at a yield of 2.19%.

"Today's five-year auction was a predictably sloppy event, though the expected concession that we believed would materialize never came through," Nomura Securities International strategists said in a research note. "Much like Tuesday's two-year, there was light customer demand with a dealer bid the strongest underpinning of the auction."

Bidders offered to buy 2.69 times the amount of debt sold, less than the six-auction average and lower than the 2.97 times amount in the previous month's auction.

Indirect bidders, which include foreign central banks, purchased 34.2%, down from 45% in the auction a month ago. Direct bidders, which include domestic money managers, purchased 7.7% versus 9.6% in the last auction.

The Treasury's auction of $29 billion of seven-year notes on Thursday is expected to go better.

"The seven-year tomorrow is in a better spot with some real money buyers preferring that sector to the five-year," the Nomura strategists said.

Ontario opens 4% 10-years

In new bond sales, the Province of Ontario (Aa1/AA-//DBRS: AA) sold C$750 million in a reopening of its 4% notes due June 2, 2021 at 98.884 to yield 4.134% on Wednesday, a source said.

The notes priced at a spread of 69 bps over the Government of Canada benchmark.

TD Securities Inc. was the lead manager.

The province originally priced C$750 million of the bonds on Jan. 7 at a spread of 70.5 bps over the Government of Canada benchmark.

The issue now has a total outstanding of C$1.5 billion.

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