July 13, 2009 / 10:11 PM / in 8 years

Canada liquidity auction snubbed as funding eases

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.

The thaw in money markets has been a global trend with the benchmark three-month rates on U.S. dollar, euro and sterling funds that banks lend among themselves hitting record lows this month.

“There are a lot of equally palatable funding possibilities out there at this time,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

The bank had withdrawn its PRA program in July of last year on an apparent easing of funding conditions at that time, only to be forced to resume the operations in September when markets became stressed again.

“(The bank) would like to emphasize that the facility is available, whether it’s being used or not and I’d be surprised if it was to withdraw it in short order,” said Lascelles.

($1=$1.15 Canadian)

Editing by Jeffrey Hodgson

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