Canada sets savings bond rates at multi-year low

* Lowest rate in at least 18 years

* Competes with bank-issued products

TORONTO, Oct 5 (Reuters) - Canada Savings Bonds, which the country has used to finance its debt since the end of World War Two, will this year offer their lowest interest rate since at least 1991, the Canadian government said on Monday.

In the latest sign of the low-rate environment brought on by the global financial crisis, Canada's finance department said a version of the government-backed bonds that can be cashed at any time will pay an annual interest rate of 0.4 percent.

The rate, posted for a one-year period, is guaranteed and may be increased during this period if "market conditions warrant," the government said.

Another version of the bond, which can only be redeemed once a year on the anniversary of its issuance and for 30 days after, will pay 1 percent. Both products will be on sale from Oct. 5 until Nov. 1.

The Bank of Canada earlier this year chopped its benchmark interest rate to a record low of 0.25 percent and pledged to keep it there until at least the middle of 2010.

A one-year Canadian government T-bill CA1YT=RR yields 0.530 percent.

The central bank move has also driven down returns on other savings products such as guaranteed investment certificates.

Royal Bank of Canada (RY.TO), the country's largest lender, offers a one-year cashable GIC with a yield of 0.2 pct. (Reporting by Jennifer Kwan; Editing by Jeffrey Hodgson)