Foreign Purchases of Canadian Bonds to Ebb Next Year, RBC Says

Canada’s allure to foreign investors as a haven will dim next year, pushing demand down and government-bond yields up, according to Royal Bank of Canada’s RBC Capital Markets unit.

Foreigners snapped up one-third of Canada’s annual gross bond issuance of C$100 billion ($102 billion) as they fled crisis-ridden bond markets in Europe, according to a Dec. 13 RBC note to clients. The purchases cut 25 basis points, or 0.25 percentage point, from 10-year government bond yields, according to RBC estimates. The benchmark reached a six-decade low of 1.565 percent in July.

An improving outlook in the euro region will “redirect” fund flows into shunned European peripheral government-bond markets, RBC analysts led by Mark Chandler, chief bond strategist, wrote.

“Strong international demand for Canadian government bonds has kept yields, particularly in the belly of the curve, lower than what they otherwise would have been,” the analysts wrote. “As 2013 progresses, an expected gradual repair of financial conditions abroad should bring a commensurate easing in safe- haven demand for Canadian bonds.”

Non-residents bought C$8.15 billion of government bonds and C$8.93 of private corporate debt -- the largest investment in more than 10 years -- while divesting C$2.97 billion of money- market paper, Statistics Canada said today in Ottawa.

The RBC note recommended investors amass holdings of the debt of European peripheral countries, such as Spanish 10-year bonds. The European Central Bank’s commitment in July to preserve the euro at any cost and the establishment of a single banking supervisor have improved sentiment in financial markets.

To contact the reporter on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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