Record-low Canadian yields seen hurting C$, pensions, aiding gov't

Tue Jan 19, 2016 2:38pm EST
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By Fergal Smith and Matt Scuffham

TORONTO Jan 19 (Reuters) - A plunge in Canadian bond yields to record lows is seen further undermining the country's struggling currency and increasing the funding challenges for its pension plans, even as it offers welcome savings to cash-strapped governments.

Canada's 10-year government bond yield touched an all-time low of 1.143 percent on Monday, well below the yield of more than 2 percent for its U.S. counterpart, as a drop in oil to its lowest price since 2003 darkened the country's economic outlook.

Oil's move also knocked the Canadian dollar to a 12-year low on Monday. Traders have increased bets in recent sessions that the Bank of Canada will cut interest rates on Wednesday to support the economy, a prospect that has driven bond prices higher.

Analysts said the resulting lower yields add to downside risks for the Canadian dollar by reducing the allure of Canadian assets for foreign investors.

"Relative to the U.S. and some other countries we're offering less attractive returns and that just puts downward pressure on our currency," said Sal Guatieri, senior economist at BMO Capital Markets.

Low government bond yields also make it harder for Canadian pension funds to meet their long-term obligations to the country's aging population, raising concerns some plans could experience shortfalls.

"Various jurisdictions in Canada have provided temporary funding relief to defined benefit pension funds in recognition of the stressed environment," said David Zanutto, Canadian Director of Strategic Research at consultancy Mercer.

"If this relief ends and low rates persist, a number of plan sponsors could face significant difficulty."   Continued...