* Foreign investment hits record C$26.11 billion
* Foreigners buy C$16.67 billion of bonds, most in 3 years
* Canada increasingly seen as a haven amid world turmoil
By David Ljunggren
OTTAWA, July 16 Foreign investment in Canadian
securities hit a record high in May on heavy buying of its
higher yielding government debt, a sign of Canada's growing role
as a safe haven during global economic turmoil.
Canada, which boasts stronger fiscal and economic
fundamentals than most developed Western economies, said
non-residents bought C$26.11 billion ($25.60 billion) of stocks,
bonds and money market paper in May, well above the previous
C$22.88 billion record from May 2010.
That reflected both higher interest rates in Canada and
intensifying economic problems elsewhere.
"The strong inflows into Canadian assets happened at the
same time as euro zone tensions re-intensified. This strengthens
the argument that Canada is gradually becoming a safe-haven,"
Charles St-Arnaud of Nomura Global Economics said in a research
"The majority of the flow was into bonds rather than
money-market instruments, signaling that investors are
comfortable with Canada's long-term outlook."
AAA-rated Canada emerged from the global financial crisis in
better shape than most other developed nations, a draw to
investors worried about economic problems in Europe and the
patchy U.S. recovery.
HIGHER YIELDS APPEAL
In May, long-term Canadian interest rates exceeded those in
the United States by the most since September 2011, Statistics
Canada said. At the same time, the Canadian dollar depreciated
against the U.S. dollar to the lowest level since September
Analysts said the foreign interest has helped support the
Canadian dollar, which hit a record high against the euro
on Monday. It rose to C$1.2362 to the euro, or 80.93
euro cents, its strongest level since Europe's common currency
was created in January 1999.
A stronger Canadian dollar keeps Canadian inflation and
borrowing costs low. But it also makes Canada's exports more
expensive at a time when the manufacturing base is struggling.
Statistics Canada said foreigners bought C$16.67 billion of
Canadian bonds in May, the most since May 2009. Of that, C$9.47
billion were federal government bonds mainly purchased on the
"While the Canadian market does not benefit from the same
safe haven status afforded to the United States, a steady
diversification in economic exposure towards emerging market
economies and superior fiscal fundamentals enhances the appeal
of Canadian dollar assets," TD Securities strategist David Tulk
said in a note to clients.
"We expect this theme of strong foreign interest in Canadian
securities will help to restrain government yields and support
Canada's debt market will never compete with the U.S. one in
terms of scale and liquidity. But because Canada raised interest
rates as its economy recovered from the crisis, much of its
government debt yields more than that of other major economies.
Canada's two-year bond yielded 0.95 percent on
Monday, well above the 0.23 percent yield of its U.S.
equivalent. The yield on Germany's two-year bond
has actually gone negative due to inflows
triggered by the euro zone crisis.
The spread between Canadian and U.S. two-year bonds traded
at some of their widest levels of the year in early May.
Statistics Canada said nonresidents also bought C$7.35
billion worth of money market instruments in May. By the end of
May, those holdings hit a record C$69.89 billion.
Despite May's overall figures, total foreign investment in
Canadian securities in the first five months of 2012 fell to
C$42.32 billion from C$45.66 billion a year earlier.
Canadians purchased a more modest C$1.32 billion worth of
foreign securities in May, buying C$1.72 billion of stocks and
C$442 million of bonds while reducing their holdings in money
market instruments by C$844 million.