UPDATE 1-Canadian bonds surge after U.S. plan rejected

*Canadian bond market set for more gains on safety bid

*Canadian dollar slips 0.7 percent against greenback

*Perceived chances of rate cut jump 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 U.S. $700 billion bailout package for the ailing financial sector.

The Canadian dollar slipped against the U.S. dollar, but stayed in the middle of a range it has held in recent days. Canada, with its relatively minor direct exposure to the financial crisis, was being seen as something of a safe haven, though a plunge in energy prices still weighed heavily on the commodity-linked currency.

The Toronto Stock Exchange fell over 900 points, erasing 300 points minutes after the U.S. House of Representatives’ rejected of the U.S. Troubled Asset Relief Program See [ID:nSP371928], 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 2-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.


At 3:00 p.m. (1900 GMT), the Canadian dollar was at C$1.0397 to the U.S. dollar, or 96.18 U.S. cents, down from C$1.0328, or 96.82 U.S. cents, at Friday’s close.

While lower, the currency was well off its weak point of the day, or C$1.452, or 95.68 U.S. cents, hit early in the session.

“The Canadian dollar is still holding on is that given all these tumultuous global economic developments, Canada is still largely escaping it, so we are now almost trading more like a safe haven, and less like the cyclical currency that Canada has traditionally considered to be,” said David Watt, senior currency strategist at RBC Capital Markets.

In the United States, Citigroup Inc C.N said it will acquire the bulk of Wachovia Corp's WB.N assets and liabilities. See [ID:nN29469599].

In Europe, the Belgian, Dutch and Luxembourg governments jumped to nationalize parts of banking and insurance group Fortis FOR.BR, injecting 11.2 billion euros in a bid to prevent U.S.-style financial contagion engulfing one of Europe's top 20 banks. See [ID:nLT408294]

The concerns over the global economic outlook have put a dent in commodity prices with U.S. crude oil CLc1 down well over $10 to just above $96 a barrel. As a major exporter of oil and base 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.

The Bank of Canada 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 Frank McGurty)