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Traders Downplay Waning July Rate Expectations: Canada Credit

Traders are betting the Bank of Canada’s concern about an “increasingly uneven” global recovery won’t keep policy makers from raising interest rates again when they meet in July.

Canada’s two-month overnight index swap rate, which marks what traders expect the central bank’s policy rate will average over that period, closed yesterday at 0.5365 percent, from 0.5210 on May 31. That shows investors are pricing about a 70 percent probability of an increase at the July 20 rate announcement, according to Eric Lascelles of Toronto-Dominion Bank and Mark Chandler of Royal Bank of Canada.

“The market has not raced to change its assumption all that substantially” for a July rate increase, said Lascelles, chief economics and rate strategist at TD Securities in Toronto.

The Bank of Canada yesterday became the first Group of Seven central bank to raise interest rates since July 2008 and signaled that further increases could be delayed by slower domestic and global growth. Policy makers led by Governor Mark Carney increased the target rate on overnight loans between commercial banks to 0.5 percent from a record-low 0.25 percent.

Rates beyond four months fell, as investors bet the central bank may not need to raise interest rates by as much as initially anticipated. Six-month swap rates fell to 0.7525 percent, from 0.7810 on May 31, while 18-month rates fell to 1.3825, from 1.4825.

“Now that they’ve kicked it off, does it make sense that they were doing this only to go 25 basis points?” said Chandler, a fixed-income strategist at RBC Capital Markets in Toronto. “The debate becomes at what point do you reach a threshold level and then pause.”

Canadian Banks

Elsewhere in credit markets, TransCanada PipeLines Ltd., a unit of TransCanada Corp., announced it had completed its offering of $1.25 billion of debt. The company sold $500 million of five-year notes, and $750 million of 30-year bonds.

Standard & Poor’s Ratings Services released yesterday a report stating that the liquidity risk profiles of Canadian banks are “commensurate” with their credit ratings.

The Ontario government announced plans to sell C$600 million ($568 million) in bonds expiring in 2039.

Canadian Imperial Bank of Commerce priced 500 million Swiss francs ($432 million) of seven-year covered bonds to yield 15 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction.

The Bank of Canada warned about “consolidation” of the recovery in the U.S., Japan and other industrialized economies, and the possibility of “renewed weakness” in Europe.

‘Broad Forces’

“Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the Ottawa-based central bank said in a statement.

The bank said “broad forces” of deleveraging by households, banks and governments will temper the pace of global growth, while concerns over European debt will result in “more rapid tightening of fiscal policy in some countries.”

Canadian Prime Minister Stephen Harper, who is hosting a summit of leaders from the Group of 20 countries next month, has made fiscal consolidation a top item on the meeting’s agenda.

In a letter sent today to G-20 leaders, Harper said markets may “dictate the terms” of any future fiscal consolidation if leaders don’t establish “credible” plans to shore up their finances.

“The medium-term outlook now is forcing the hands of policy makers to do something about fiscal policy,” Chandler said. “Whereas the market at one point was looking for rates 3 percent plus by the middle part of next year by the Bank of Canada, that’s being cast with a little bit of significant doubt.”

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