TORONTO (Reuters) - Strong demand for Canadian 10-year government bonds drove the average yield at an auction on Wednesday to its lowest level since at least 1998 as investors remained nervous about the state of the global economy.
Despite a broad rally in equity markets last month, global slowdown fears persist due to Europe's lingering debt crisis.
At home, euro zone troubles have started to hurt growth with the latest Canadian manufacturing report showing output and new order gains slowing sharply in January from December.
"All of these forces worked in earnest to make this a successful auction and it really took the market by surprise," said Ian Pollick, fixed income strategist at RBC Capital Markets.
The C$2.5 billion ($2.5 billion) auction of bonds produced an average yield of 2.015 percent, down from 2.254 percent at the last 10-year bond auction in October and 3.482 percent at the year earlier auction.
It was the lowest average auction yield in records going back to 1998. Canadian government bond prices rallied sharply last year, driving the 10-year yield to 1.84 percent in December, a low not reached in Bank of Canada records going back to 1951.
The auction results showed Canada is having no trouble finding lenders at low rates, especially as fiscal conditions in Europe remain gloomy.
"If you do think there are funding concerns globally then a lot of people have been looking to Canada as a good funding vehicle in the sense that our bonds are good collateral," said Pollick. "If you look at the variable supply of triple-A credits in the world, Canada stands out as one of the legitimate ones."
There were more than C$5.77 billion in bids from Canadian primary dealers at the auction. The bid-to-cover ratio of 2.31 was down slightly from the 2.52 of the previous auction.
The ratio is a gauge of investor appetite, and a reading above 2 generally implies a well-received auction.
The bonds, which carry a coupon of 2.75 percent, will be issued on February 6. The outstanding debt of the issue after the auction is C$7.5 billion.
Details on Bank of Canada webpage:
Editing by Jeffrey Hodgson and Peter Galloway