Canada buys C$7 billion in second mortgage auction

OTTAWA (Reuters) - Canada’s housing agency said on Thursday that its second operation to buy mortgage-backed securities from banks under a special C$25 billion ($20 billion) program generated an average yield of 4.095 percent.

The program, announced October 10, is meant to help domestic banks free up cash for lending, as their costs have risen in world credit markets.

In the C$7 billion reverse auction, Canada Mortgage and Housing Corp said the high yield accepted on five-year securities was 4.301 percent and the low yield was 3.814 percent, which is a narrower range than was seen in the first operation a week ago.

Earlier on Thursday, the agency said the minimum offer it would accept was 3.664 percent.

When Ottawa conducted its first purchase last week, it bought C$5 billion of mortgage securities at an average yield of 4.241 percent.

“The spread narrowing (between high and low yields) suggests that the auction process is becoming more efficient,” said Mark Chandler, a fixed income strategist at RBC Capital Markets.

The latest results also reflect lower short-term funding spreads than were seen in global markets a week or two ago, and the likelihood that some bidders did not need to tap into the program as much as they did in the first auction, Chandler said.

The names and the value of securities sold by participating financial institutions are not made public.

Banks have lauded the mortgage purchase program because it gives them access to lower-cost funding than they could otherwise obtain, while officials have said that the mortgages are already insured by CMHC, so taxpayers are not taking on any additional risk.

($1=$1.26 Canadian)

Reporting by Lynne Olver; editing by Rob Wilson