* Softer but solid demand for save-haven gov't bonds
* Yield rises to avg 1.097 pct from 0.954 in Sept
* Bid-to-cover ratio dips to 2.38 from 2.53
By Andrea Hopkins
TORONTO, Oct 19 Canada's sale of two-year
government bonds met with softer but still healthy demand on
Wednesday as ample supply kept buyers in check and progress on
the European debt crisis boosted risk appetite.
The C$3.5 billion ($3.47 billion) auction of bonds produced
an average yield of 1.097 percent, up from 0.954 percent at the
last two-year bond auction in August, in line with market rates
and back above the Bank of Canada's overnight interest rate
target of 1 percent.
But even with the higher yield, the bid-to-cover ratio in
the auction edged down to 2.38 percent, below the 2-year bond
auction average of about 2.57 percent, according to Ian
Pollick, a fixed-income strategist at RBC Capital Markets.
"On the surface it looks like it has some softer demand but
given the fact that it came in on the screws to where it was
trading on the screens, it was pretty positive," Pollick said.
"We know it is a hard value proposition to tell people to
get long on the front end, especially when you have all this
optimism floating around. But at the end of the day it did on
balance feel like a very reasonably good auction, better than
we had thought."
The auction came amid a new round of optimism that European
leaders will make progress on the euro zone debt crisis this
weekend, sentiment that has boosted risk appetite among
investors and cut bond prices.
Sunday's EU summit is considered a make-or-break meeting on
beefing up the euro zone's bailout fund, the European Financial
Stability Facility, and resolving the Greek debt crisis, which
threatens to engulf the entire euro zone.
Concerns about the crisis and slowing global growth have
kept pressure on the Bank of Canada to leave official borrowing
costs low for longer, and some economists have pushed out
expectations for the next bank rate hike to 2013.
That has left two-year government bond yield
stuck in a tight trading range between a multi-decade low of
75.7 basis points and 112.7 basis points for the last two
months, making Wednesday's auction a good buy in the eyes of
investors skeptical a European solution is around the corner.
"We've had a good concession in the front-end of the curve,
so ... this probably seemed a bargain for more pessimistic
people," Pollick said.
He also noted there is a lot of supply coming down the
pipeline for the two-year bond, with two more auctions before
the end of the quarter, making it unlikely that yields will
richen up relative to the current two-year benchmark.
There were more than C$8.34 billion in bids from Canadian
primary dealers at the auction. The bid-to-cover ratio of 2.38
was down from the 2.53 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 1 percent, will be
issued on Oct. 21. The outstanding debt of the issue after the
auction is C$3.5 billion.
Details on Bank of Canada webpage: