UPDATE 1-Canada eyes 40-year-plus bonds to lock in low yields

Thu Mar 21, 2013 5:26pm EDT

* Britain, Japan, France already issue 40 years or more

* U.S. looking at going beyond 30 years

* T-bill stock to fall as mortgage-backed securities mature

* Dealers note increasing foreign interest

By Randall Palmer

OTTAWA, March 21 (Reuters) - The Canadian government is considering imitating some its Group of Seven peers and most of its provinces in issuing bonds of 40 years or longer so it can lock in low interest rates, according to Thursday's federal budget.

The government also announced it would extend a temporary increase in the issue of 10- and 30-year bonds as it shifts out of short-term government debt.

"The government is assessing the potential benefit of issuing bonds with maturities of 40 years or longer," the budget document said.

Canadian officials noted the United Kingdom regularly issues 40- and 50-year bonds; Japan issues 40-year maturities and France 50 years. The longest maturity for other partners in the Group of Seven (G7) leading industrialized countries - the United States, Germany and Italy - is 30 years.

Mexico has issued a 100-year U.S.-dollar bond.

"Government of Canada securities are among the world's most sought-after," Finance Minister Jim Flaherty told the House of Commons in delivering a budget in which he promised a budget surplus by 2015-16.

Canada first moved to 30-year bonds in 1991. On Wednesday, the 30-year yield was a historically low 2.55 percent.

The government has found that the provincial experience with ultra-long bonds is that the extra 10 or more years of maturity can be added with little additional cost, sometimes even with a lower yield than the 30-year maturities.

Market participants consulted by the Bank of Canada and Finance Department said that although the need for long-duration assets remained strong, the level of demand for a Canadian government bond of 40 years or more was untested, according to a summary of the comments provided by the Bank of Canada.()

"Market participants commented that Canadian-dollar ultralong bonds issued by provinces are mainly purchased by domestic pension funds and life insurance companies," the summary said.

"Most participants noted that if the government of Canada were to issue ultralong bonds, it should consider distributing them outside the auction process that is used for existing government of Canada Canadiandollardenominated debt."

The government's debt management strategy for the 2013-14 fiscal year plans for the stock of shorter-term treasury bills to decline to C$149 billion ($146 billion) on March 31 next year from C$181 billion on April 1 this year.

This is in parallel with the maturing of about C$41 billion of mortgage-backed securities purchased under the Insured Mortgage Purchase Program in 2008 and 2009 during the financial crisis.

This inflow of cash will turn the government cash-positive this year - moving from having a financial requirement of C$27.8 billion in the year that's ending in 10 days to being a financial source of C$21.8 billion in 2013-14.

"The fact that they want to issue more 10s and 30s is also good news in terms of refinancing risks, interest rate risks," said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.

Foreign investors are increasingly active in the Canadian government securities markets across the yield curve but focused especially on the two, three, and fiveyear sectors, said the dealers consulted by the central bank and the Finance Department.

They noted that some had expanded into 10-year bond futures as well as Canada Mortgage Bonds and provincial issues.

The budget also said the government's issue of bonds, net of buybacks, would fall to C$87 billion in 2013-14 from C$94 billion this year. Net of both buybacks and maturities, as well as other adjustments, the increase in Canada's bond stock will be C$18 billion in 2012-13 and C$11 billion in 2013-14.

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