Canadian short-dated debt rallies as Bank of Canada holds key rate unchanged at 1%

By Cristal Cody

Prospect News, Oct. 19 - Canadian bonds rallied on Tuesday after the Bank of Canada held key interest rates unchanged at a target rate of 1% based on slow economic growth.

"The Canadian bond market has rallied pretty aggressively today in the five-year sector in particular," said Eric Lascelles, chief Canada macro strategist at TD Securities in Toronto.

The Bank of Canada kept the benchmark overnight rate unchanged after three previous hikes of 25 basis points each.

"At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered," the Bank of Canada said in its statement.

The statement was "dovish" in nature, which further encouraged investors to flock to bonds, Lascelles said.

"As it stands now, the Bank of Canada is not expected to do much over the next several months, and that's reflected in the bond market rally in Canada today," Lascelles said.

The Canadian five-year note saw the greatest performance, sending the yield down 9 bps to 1.86%.

Canada's two-year note yield dropped 8 bps to 1.34%.

Coming up on Wednesday, the market will be scouring the Bank of Canada's Monetary Policy Report scheduled for release for any additional insights.

No new deals were seen in the Canadian corporate bond market, though several are in the works for the weeks ahead, including from fertilizer company Potash Corp. of Saskatchewan Inc., according to sources.

U.S. Treasuries also rallied on Tuesday on the drop in stocks as investors sought safer assets on reports that Pacific Investment Management Co., Blackrock Inc. and the New York Federal Reserve Bank plan to force Bank of America Corp. to buy back $47 billion of bad mortgage bonds.

"That has caused the market to reverse course very sharply," said Mary Ann Hurley, a fixed income trader for D.A. Davidson & Co.

The rise sent yields down, with longer-dated bonds showing the most strength.

The yield on the 10-year benchmark note fell to 2.48% from 2.51%. The 30-year bond yield eased 4 bps to 3.91%. The two-year note yield was unchanged for a second day at 0.36%.

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