*Canadian dollar slips 0.5 percent against greenback
*Energy production powers Canada GDP higher in July
*Canadian bonds unwind on hopes of bailout resurrection
TORONTO, Sept 30 (Reuters) - The Canadian dollar fell against a well-bid U.S. dollar on Tuesday as credit markets tightened in response to Monday’s rejection of the $700 billion financial market bailout plan by U.S. lawmakers, sending investors scrambling to buy greenbacks.
Canadian bond prices unwound some of the big gains they made in the previous session on expectations that Washington would revisit the rescue plan and pass it.
At 9:54 a.m. (1354 GMT), the Canadian dollar was down 0.5 percent at C$1.0496 to the U.S. dollar, or 95.27 U.S. cents. That compared to C$1.0439, or 95.79 U.S. cents, at Monday’s close.
The losses added to the 1.1 percent decline from Monday and put the currency down 1.2 percent for the month going into the last session of September.
One of the aims of the proposed $700 billion U.S. Troubled Asset Relief Plan was to help grease the wheels of money markets. Credit markets have seized up as financial institutions have collapsed under the weight of murky mortgage debt, and the ones that have survived are extremely cautious about lending to one another.
Under the TARP, the U.S. government would have bought up the bad debt, taking much of the risk away from lenders.
“U.S. dollars are very scarce right now,” said George Davis, chief technical strategist at RBC Capital Markets.
He said that will likely be the case for some time and will keep the U.S. dollar bid, likely leading to some residual weakening in the Canadian dollar.
The currency market ignored news that the Canadian economy grew more than expected in July, up 0.7 percent, compared with the 0.2 percent consensus expectation. See [ID:nN30397290]
“With the rejection of the TARP plan and all the volatility in the markets right now, the data has become more of a secondary consideration because the market is more focused on the here-and-now,” Davis said.
Canadian bond prices fell as investors bet that Washington would be able to resuscitate the bailout plan, giving a boost to equities and sapping the takeover bid that charged up the bond market in the previous session.
“It (the bond market) is just back and forth like a yo-yo on bailout-no bailout, good merger-bad merger,” said James Dutkiewicz, who oversees about C$5 billion in fixed-income assets at CI Investments.
“Definitely funding is getting tighter and tighter,” he said. “It’s a global phenomenon now, with Europe, the U.S., and Canada won’t be immune to it, though it will be a little less sticky.
The overnight Canadian Libor rate LIBOR01 spiked higher, indicative of the tighter credit markets. It jumped to 4.5000 percent, up from 3.4283 percent on Monday. The Libor rate is the rate at which banks borrow funds from each other in the London interbank market.
Monday’s CORRA rate CORRA= was 2.9929 percent, up from 2.9808 percent on Friday. The Bank of Canada publishes the previous day’s rate at around 9 a.m. daily.
The two-year bond fell 9 Canadian cents to C$100.35 to yield 2.582 percent. The 10-year bond slid 59 Canadian cents to C$105.46 to yield 3.576 percent.
The yield spread between the two-year and the 10-year bond was 110 basis points, down from 113 basis points at the previous close.
The 30-year bond tumbled C$1.00 to C$115.50 for a yield of 4.077 percent. In the United States, the 30-year Treasury yielded 4.159 percent.
The three-month when-issued T-bill yielded 1.70 percent, down from 1.75 percent at the previous close. (Reporting by John McCrank; Editing by Peter Galloway)