UPDATE 2-Fear sends yields plunging at Canada 10-yr auction

Wed Oct 5, 2011 2:53pm EDT

* European woes spur demand for safe-haven gov't debt

* Yield drops to avg 2.254 pct from 2.994 in July

* 10-year yield recently at 60-year low

* Bid-to-cover ratio rises to 2.52 from 2.46 (Adds background)

By Andrea Hopkins

TORONTO, Oct 5 (Reuters) - Canada's sale of 10-year government bonds saw strong demand on Wednesday, as fears about Europe's debt crisis and possible global recession fueled investor hunger for safe-haven assets.

The C$2.5 billion ($2.4 billion) auction of bonds produced an average yield of 2.254 percent, down from 2.994 percent at the last 10-year bond auction in July.

It was the lowest average auction yield in at least 5 years and likely much longer. Canadian government bond prices rallied sharply last month, driving the 10-year yield CA10YT=RR to 1.99 percent, a low not reached in Bank of Canada records going back to 1951.

Yet even with the lower yield, the bid-to-cover ratio in the auction edged up to 2.52 percent, stronger than the 2011 average for 10-year bonds of 2.39 percent.

"It was a very, very well received auction -- there are a lot of things going for the auction right now," said Ian Pollick, fixed income strategist at RBC Capital Markets.

"This was the only 10-year supply that you're going to get for the fiscal quarter and there is a nice pick on the roll -- meaning that if you were to sell the current benchmark to buy the bonds that were just issued, you could basically pick up 13 basis points and extend duration for a year. And that's pretty attractive in an environment where it is generally risk-off most days."

The results showed Canada is having no trouble finding lenders at low rates, even as borrowing costs spike for countries like Greece.

The growing prospect of a debt default by Greece in the coming months has stoked fears of a major banking crisis in Europe that would aggravate the global economic slowdown. But this week European finance ministers agreed to examine ways to beef up banks' balance sheets and prevent a full-blown financial crisis, buoying global markets. [MKTS/GLOB]

The progress, however slight, has helped bond yields back up in the last few sessions, but sentiment has remained mostly resigned to a long road ahead with few clear-cut solutions - the perfect atmosphere for the auction.

"People probably don't expect the European situation to be cleaned up in one simple scoop," Pollick said.

"So I think they are saying, yes yields are very low right now but we've had a nice backup over the past few sessions, and if we don't think risk is generally back on the table, then it could be the time to extend duration and grab some bonds."

There were more than C$6.29 billion in bids from Canadian primary dealers at the auction. The bid-to-cover ratio of 2.52 was up slightly from the 2.46 percent of the previous auction.

The ratio is a gauge of investor appetite, and a reading above 2 generally implies a well-received auction.

The bonds, which carry a coupon of 2.75 percent, will be issued on Oct. 11. The outstanding debt of the issue after the auction is C$5 billion.

Details on Bank of Canada webpage: here

Also see:

<CA/GOVT> BOCBOND

(Access may depend on subscriber level) (Editing by Jeffrey Hodgson)

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