September 29, 2008 / 8:26 PM / 9 years ago

Canadian bonds surge as investors seek safe haven

*Canadian bond market set for more gains on safety bid

*Canadian dollar slips 1.1 percent against greenback

*Chance of rate cut seen jumping as uncertainty rises

TORONTO, Sept 29 (Reuters) - Canadian bond prices rallied on Monday as investors exited equities en masse after U.S. lawmakers rejected the proposed $700 billion bailout package for the ailing financial sector.

A plunge in energy prices weighed on the commodity-linked Canadian dollar, which had fallen 1.1 percent against the U.S. dollar by the end of the North American session.

The Toronto Stock Exchange closed down 840 points, with 300 points evaporating in just a few minutes after the U.S. House of Representatives rejected the U.S. Troubled Asset Relief Program See [ID:nLT436737], which was intended to bring relief to the financial sector and get credit markets moving again.

The uncertainty fueled a powerful rally in the bond market as investors sought relatively secure government debt.

“This bill was more or less assumed to go through. Now that it hasn’t it’s left a big question mark as to what the (U.S.) Treasury will do, so there’s really a massive flight to safety,” said Charmaine Buskas, senior economics strategist at TD Securities.

She said the bond market was likely set for more gains as as long as the uncertainty remains.

The two-year bond rose 59 Canadian cents to C$100.42 to yield 2.549 percent. The two-year yield most closely reflects where the market thinks the Bank of Canada’s key lending rate should be. The perceived chance of a quarter-point Bank of Canada rate cut jumped to 92 percent on Monday from around 50 percent on Friday, according to market data from Thomson Reuters [BOCWATCH]

The 10-year bond gained $1.60 Canadian cents to C$106.05 to yield 3.506 percent.

The yield spread between the two-year and the 10-year bond was 113 basis points, up from 87.3 basis points at the previous close.

The 30-year bond jumped C$2.20 to C$116.30 for a yield of 4.024 percent. In the United States, the 30-year Treasury yielded 4.159 percent.

The three-month when-issued T-bill yielded 1.75 percent, down from 1.90 percent at the previous close.

CANADIAN DOLLAR SLIDES WITH OIL

The Canadian dollar ended the session at its lowest point in a week at C$1.0439 to the U.S. dollar, or 95.79 U.S. cents. That compared to C$1.0328, or 96.82 U.S. cents, at Friday’s close.

Concerns over the global economic outlook have put a dent in commodity prices with U.S. crude oil CLc1 down well over $11 to below $96 a barrel. As a major exporter of oil and metals, the Canadian dollar often moves in line with resource prices.

“Given that even (U.S. Federal Reserve Chairman Ben) Bernanke has said that if we didn’t get this done, the economic outlook goes from bleak to dire, I think that is one of those things that is starting to weigh on oil prices more definitively, and has the potential to weigh on CAD.”

Before the bailout was rejected, there were more financial market disruptions, with Citigroup Inc C.N swooping in to acquire the bulk of Wachovia Corp’s WB.N assets and liabilities. See [ID:nN29469599].

Europe was also showing cracks, with the Belgian, Dutch and Luxembourg governments jumping to nationalize parts of banking and insurance group Fortis FOR.BR, saying it is too big to let fail. They injected 11.2 billion euros in a bid to prevent U.S.-style financial contagion engulfing one of the continent’s top 20 banks. See [ID:nLT408294]

In Canada, the central bank moved to increase U.S. dollar liquidity in Canadian markets by expanding its swap facility with the U.S. Federal Reserve to US$30 billion from US$10 billion as part of a coordinated action by global central banks to grease seized-up money markets. See [ID:nN29376861] (Reporting by John McCrank; Editing by Peter Galloway)

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