Central Bank Rate Increase Expectations Surge on Jobs Data: Canada Credit

Credit markets indicate investors are becoming certain the Bank of Canada will raise interest rates at a second consecutive meeting after the country posted the largest quarterly gain in employment on record.

The benchmark two-year bond’s yield climbed 29 basis points to 1.72 percent in the three trading sessions ended July 9, the most since October, according to Bloomberg data. Rates on overnight index swaps and bankers acceptances also rose as investors increased bets on a rate increase July 20.

The jobs report “cements the view that the bank will raise rates,” Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal, said in a telephone interview. Leitao said he expects three more 25-basis-point increases by year-end.

The yield gap between 10-year Canadian bonds over 2-year securities decreased to 1.50 percentage points, the narrowest level since October 2008. The so-called yield curve touched 2.32 percentage points on Jan. 11, the widest since January 2002.

Canada created 93,2000 jobs in June, almost five times more than economists expected, capping a three-month period where employment rose by 226,600, the greatest increase in employment in records dating to 1976. The jobless rate fell to 7.9 percent, the lowest since January 2009, from 8.1 percent. Canada is the first country in the Group of Seven to recoup employment losses from the global recession.

The odds of the Bank of Canada raising its interest rate to 0.75 percent at its July 20 meeting rose to 96 percent from 76 percent on June 8, according to a Credit Suisse Group AG calculation derived from overnight index swaps. Yields on 1- month overnight index swaps, which measure what investors think the bank’s policy rate will average over the period, rose to 0.6645 percent after the report from 0.632 percent.

Maple Bonds

Elsewhere in credit markets, National Australia Bank Ltd. sold C$400 million ($387 million) of Canadian-dollar denominated bonds on July 9. The 4.19 percent so-called “Maple” bonds, which mature in July 2015, were sold to yield 168.5 basis points over a comparable government bond.

The extra yield investors demand to own Canadian company debt rather than federal government debt remained at 147 basis points, according to a Bank of America Merrill Lynch index. The yield gap, or spread, had been as narrow as 114 basis points on March 19. Overall yields rose to 4.09 percent from 4.03 percent.

The Bank of Canada will publish its quarterly survey of senior loan officers and business executives at 10:30 a.m. New York Time. The surveys may give an indication about the availability of credit for companies and their optimism about future sales.

Sparked a Reaction

The jobs report also sparked gains in bankers acceptances futures. Yields on the September 2010 bankers’ acceptances contract rose to 1.12 percent on July 9 from 1.045 percent the previous day. So-called Bax contracts have settled an average of about 20 basis points above the central bank’s overnight target since 1992, Bloomberg data show.

Economic data earlier last week, including weaker-than- expected readings on building permits and the Ivey purchasing managers index, helped push the two-year bond yield to as low as 1.56 percent.

“There was undue pessimism priced in” the bond market about the recovery, Mark Chandler, head of Canadian fixed-income and currency strategy at Royal Bank of Canada, the nation’s largest lender, said by phone from Toronto. “You still have to get to the low end of normal on rates. Pressure on the front end, a flattening curve, are all part of the process going forward for Canada.”

To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net Frederic Tomesco in Montreal at tomesco@bloomberg.net.

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