Canada liquidity auction snubbed as funding eases

Mon Jul 13, 2009 6:05pm EDT
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By Louise Egan and Jennifer Kwan

TORONTO (Reuters) - The Bank of Canada encountered weak take-up in its liquidity auction on Monday for the first time since it started the program, the latest sign a credit market freeze that preceded the global financial crisis is starting to thaw.

The central bank managed to buy just C$2.25 billion ($1.96 billion) worth of securities in the money market even though it had offered to buy C$3 billion. It will resell them on October 7.

The bank has been conducting the so-called Purchase and Resale Agreements (PRAs), with a few pauses, since the onset of the credit crunch in 2007. At its peak, the bank had injected almost C$40 billion into markets.

A spokeswoman at the central bank said this was the first time there had not been full demand for a PRA.

Funding in money markets has been gradually improving, so banks are less desperate for central bank help, analysts said.

"Most the institutions had access to wholesale funding and term funding themselves through issues. As a result of that, there just wasn't the same demand for the bank facilities," said Mark Chandler, fixed income strategist at RBC Capital Markets.

"This is part of a longer term trend. We peaked in terms of the PRAs at January," he said.

The average yield on the Bank of Canada's 84-day PRA was 0.254 percent. The PRA had a high yield of 0.260 percent and a low yield of 0.250 percent.   Continued...