Australia May Offer Yield Guidance Ahead of Central Bank: Canada Credit

Canadian investors may want to look to Australia for guidance about the path of bond yields ahead of the Bank of Canada’s June 1 interest rate decision.

Sell 2-year bonds and buy 5- and 10-year debt because a likely interest-rate increase by Bank of Canada Governor Mark Carney will lead to a revision higher of yield forecasts as occurred in Australia, said Mohammed Ahmed, a rates strategist at Canadian Imperial Bank of Commerce in Toronto.

A two-day rally in Canadian two-year securities that reduced the yield to 1.82 percent on May 14 makes the case for selling “all the more compelling -- you’ve got an opportunity to sell Canadian bonds at loftier levels,” Ahmed said.

The Bank of Canada would become the first Group of Seven central bank to boost borrowing costs since last year’s recession if it moves in June.

Australian two-year bond yields rose 50 basis points in the 10 days that followed the Oct. 6 rate increase by the Reserve Bank of Australia. Ahmed doesn’t expect Canadian yields to rise that much, though “we anticipate that the June 1 announcement will be a catalyst for meaningful underperformance of the two- year” he said.

Elsewhere in credit markets, Canadian Imperial Bank of Commerce sold C$800 million in securities backed by credit-card loans on May 14. The 3.048 percent Cards II Trust notes mature in May 2013, and were sold to yield 80 basis points over comparable government debt.

Financement Quebec, a provincial government lending agency, sold an additional C$20 million in floating-rate notes maturing in June 2016. The sale raises the amount outstanding to C$244 million.

Exit Plan

Canwest Global Communications Corp.’s newspaper division plans to hold a creditors’ vote on its plan to exit bankruptcy on June 10, according to court documents. The exit plan includes the sale of the newspapers to a group of bondholders led by Canadian media executive Paul Godfrey, who had agreed on May 10 to buy the assets for C$1.1 billion.

The premium investors demanded to hold corporate instead of government debt was unchanged on May 14 at 136 percentage points, according to a Bank of America Merrill Lynch index. The spread has widened from 124 basis points on May 3.

Canadian yields will likely rise after June 1 as investors get more clarity about the path of borrowing costs, said Roger Quick, a fixed income analyst with Scotia Capital Inc. in Toronto.

If the central bank does raise rates on June 1, policy makers may say something like “‘We’re going to take rates up significantly from emergency levels’ and that’ll cause the front end to sell off again,” Quick said.

Canadian two-year government note yields are near the highest in more than two years relative to comparable U.S. debt. Canada’s two-year security yielded 1.04 percentage points more than its U.S. Treasury counterpart on May 14. The gap, or spread, was 1.15 percentage points on May 12, the widest since Feb. 29, 2008. It was as narrow as 0.30 percentage point on Jan. 27.

To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.

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