Canada buys C$5 billion in mortgages from banks

OTTAWA (Reuters) - The Canadian government bought C$5 billion ($4.2 billion) of mortgages from financial institutions on Thursday, giving them more cash to make loans and try to overcome the severe constraints in global credit markets.

Ottawa, acting through government-run Canada Mortgage and Housing Corp (CMHC), plans to buy up to C$25 billion in the securities, which mature in five years. The aim is to help banks raise longer-term funding, which has been expensive in recent months, so that they can make more loans available to Canadian businesses and consumers.

The newly reelected Conservative government has vowed not to spend more of taxpayers' money in helping banks and in fact, may stand to make a profit as it designed the auction so that the return on its investment will be higher than its borrowing cost.

The average yield on the auction was 4.241 percent, with a high yield of 4.679 percent and a low yield of 4.041 percent.

Earlier on Thursday the CMHC had said it would only accept offers with a minimum yield of 3.925 percent.

CHMC did not say which institutions offloaded the mortgages from their balance sheets or how much was offered in total. Each issuer was allowed to sell up to C$1.25 billion.

The fact that the low yield was well above the minimum indicates that there was decent interest in the auction, but the bidding also spanned a wide range, said Mark Chandler, fixed income strategist at RBC Capital Markets in Toronto.

"There was a fairly wide dispersion of bids, so you can imagine that there's a handful of institutions that have a greater need for that liquidity (than others)," he said.

The wide range could also reflect the fact that the CMHC auction process is new, he added.