Carney's Pause `Recipe' Is Flavored by Job Losses, Housing: Canada Credit

Investors have become more convinced the Bank of Canada will stop raising interest rates at next week’s meeting than at any time since it last boosted borrowing costs on Sept. 8.

Following declines in jobs and housing starts, the yield on the December bankers’ acceptance contract, the most actively traded contract, fell to 1.305 percent on Oct. 8 from 1.310 percent. It’s the lowest since Sept. 7, the day before the Bank of Canada raised its key rate to 1 percent from 0.75 percent.

During the past month, Canadian government securities returned 1.39 percent, the fourth-best performer among 26 countries’ debt, according to the Bloomberg/EFFAS Bond Index. Government figures released Oct. 8 showed an unexpected loss of 6,600 jobs and a decline in housing starts in September, and a survey found small companies saw little gain in credit access.

The reports are “a recipe for maintaining a very pro- growth type of monetary policy,” said Aron Gampel, deputy chief economist at Scotia Capital in Toronto. “The Bank of Canada will go on hold, not only in October, but probably through a good part of next year.” Bank of Canada policy meetings are scheduled for Oct. 19 and Dec. 7.

Employment gains averaged 6,600 during the past three months, down from the 75,530 average in the previous quarter, according to Statistics Canada. Housing starts fell 1.5 percent to a seasonally adjusted annual pace of 186,400 in September, according to Canada Mortgage and Housing Corp.

Carney’s Stance

Bank of Canada Governor Mark Carney, who has raised the bank’s key lending rate three times this year, has already signaled he’ll apply “caution” in the face of a “more gradual” recovery in Canada and signs the U.S. Federal Reserve may ease policy.

“Taking a wait-and-see approach is a smart thing to do at this time,” Gampel said in a telephone interview. Last week, Gampel’s bank changed its forecast for the next central bank rate increase to September 2011 from January.

Elsewhere in credit markets, Financement Quebec, which seeks loans on behalf of schools, universities and hospitals, added C$170 million to its bonds due in June 2016, with a floating-rate coupon set quarterly at 27 basis points greater than the Canadian Dealer Offered Rate known as CDOR.

2-year Sale

Canada tomorrow will auction C$3 billion ($3 billion) of 2- year notes, according to a statement on the Bank of Canada’s website. The 1.5 percent securities mature in December 2012. The amount of extra yield investors demand to own Canada’s 2-year securities versus similar maturity U.S. notes stood at 98.5 basis point on Oct. 8, compared with 101.9 basis points Sept. 15 when Canada last sold 2-year debt.

The extra yield investors demand to hold corporate debt instead of government bonds stood at 145 basis points on Oct. 8 unchanged from a week earlier. Yields fell to 3.57 percent from 3.68 percent. The securities have returned 7.54 percent this year, compared with 11.3 percent in the U.S. and 9.05 percent globally.

In the provincial bond market, relative yields stood at 57 basis points Oct. 8 down from 58 basis points Oct. 1, the Merrill Lynch data show. Bonds in the index have returned 7.85 percent this year, compared with 3.71 percent in all of last year.

Canadian financial markets were closed yesterday for the nation’s Thanksgiving Day holiday.

Lending Conditions

The central bank’s own surveys of business executives and lending officers last week found evidence of a “modest” recovery and easier credit conditions. Still, the bank said “lending conditions appeared to be largely unchanged” for smaller companies during the third quarter.

“It isn’t that easy to get financing,” Jayson Myers, president of Canadian Manufacturers & Exporters, said in an Oct. 7 interview at Bloomberg’s Ottawa office. “There are a lot of companies that are very proud of the fact that they aren’t going to the bank now because they are working off their own cash.”

Claude Guevin, chief financial officer of Rona Inc., Canada’s largest home-improvement retailer, said he recently met with bankers who are struggling to find companies that will borrow money. “The financing isn’t a problem and I’m sure it’s the case for many other companies,” he said.

Customers at Boucherville, Quebec-based Rona are still being “selective” in their purchases, Guevin said. “I cannot confirm a real recovery, he said by telephone. “It was a deep recession, it’s a world recession, so it will take a while to get out.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

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