John Detrixhe
May 27 (Bloomberg) -- The longest maturity Canadian government bonds are rallying the most in nine months as waning global economic growth damps expectations of inflation.Canadian government securities due in 25 years or more have gained 3.72 percent in May, compared with 0.12 percent for those maturing in a year or less -- the widest gap since August -- according to Bank of America Merrill Lynch index data. Canadian long bonds are also outperforming their U.S. counterparts, with Treasuries due in 20 years or more returning 3.57 percent.
Investors are tempering expectations of rising inflation and seeking less-risky assets such as Canadian government bonds while signs of slowing global growth, including in the U.S., have led investors to pare bets on higher Canadian interest rates. The odds of a Bank of Canada interest-rate increase by September sank below 50 percent for the first time since March last week, swaps trading shows.
"The perceived status of Canadian government bonds has gotten a bit of bid,” said Ric Palombi, a fixed-income manager at McLean & Partners Wealth Management Ltd. in Calgary, which oversees more than C$1 billion ($1.02 billion). He cited renewed concerns that European governments will be unable to repay debts, and said “obviously, the U.S. has an issue with its debt ceiling."
The U.S. Commerce Department reported yesterday that gross domestic product in the world’s largest economy grew at a 1.8 percent annual rate in the first quarter, less than the 2.2 percent expansion forecast in a Bloomberg News survey of economists. Initial jobless claims unexpectedly rose last week.
‘Safe Haven’
“Canada stands out as a safe haven because of our more positive fiscal backdrop,” said Kam Bath, a fixed-income strategist at Royal Bank of Canada’s RBC Capital Markets unit in Toronto. “We are positive, but cognizant of the risks that have increased over the last few weeks,” he said of his firm’s view on global growth.
Canadian Finance Minister Jim Flaherty said May 25 he’s seeking to eliminate the country’s deficit in the fiscal year that begins April 2014, a year earlier than previously forecast. Pacific Investment Management Co.’s Bill Gross reiterated yesterday that Canadian government bonds are a better option than Treasuries.
Elsewhere in credit markets, Standard & Poor’s said it raised DundeeWealth Inc.’s credit rating to A from BBB- because the money management company is “strategically important” to parent Bank of Nova Scotia.
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government increased yesterday to 130 basis points, or 1.3 percent, from 129 on May 25. Yields fell five basis points to 3.72 percent.
Canadian corporate bonds have gained 2.7 percent since the start of the year, compared with a climb of 1.7 percent for Canadian government bonds, according to Bank of America Merrill Lynch data.Yields on five-year Government of Canada bonds rose 1 basis point to 2.34 percent today. The difference between yields on five-year Canadian government bonds and U.S. Treasuries of the same maturity narrowed by about 1 basis points to 60 basis points.
In the provincial bond market, relative yields remained at 55 basis points yesterday, while yields fell to 3.17 percent from 3.22 percent. The securities have advanced 1.9 percent this year.Ontario Notes
Ontario sold an additional C$790 million of its floating- rate notes due in June 2016. The coupon will be set quarterly at 18 basis points greater than the Canadian Dealer Offered Rate, known as CDOR. The issue now has C$900 million outstanding.Nova Scotia sold C$300 million of its 4.4 percent notes due in June 2042. The securities were priced to yield 91 basis points more than comparable federal benchmarks.
Canadian government bonds due in 30 years rallied in May as inflation rose slower than forecast the previous month. The 4 percent security due in June 2041 has risen C$3.80 in May to C$109.47, with the yield falling 20 basis points to 3.49 percent.Consumer prices rose 3.3 percent in April from a year earlier, Statistics Canada said May 20 in Ottawa, less than the 3.4 percent gain economists predicted. The Bank of Canada predicted in April that inflation will slow to 2.5 percent by the end of 2011 and 2 percent by the middle of next year.
The Standard & Poor’s GSCI Index of 24 raw materials has fallen 8.1 percent this month, poised to snap eight straight months of gains.‘Knock-On Effects’
“You’re looking at the anemic growth that’s coming out of the U.S., and you’re starting see the knock-on effects from Japan,” said Noel Hebert, credit strategist at Mitsubishi UFJ Securities USA in New York. “That’s all feeding into people trying to gauge what that means for risk assets. A lot of risk assets feel fully valued.”Japan’s economy is in its third recession in a decade after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending.
Canadian and German government debt, as well as U.S. corporate securities, are attractive alternatives to Treasuries as the U.S. keeps borrowing rates low to reduce its debt burden, Gross, who runs the world’s biggest bond fund at Pimco, said during an interview on Bloomberg Television’s “Surveillance Midday.” Pimco, based in Newport Beach, California, oversees more than $1 trillion in assets.
