Bloomberg News

Global Crisis Sinks Yield, Policy Rate Forecasts: Canada Credit

October 04, 2011

Oct. 4 (Bloomberg) -- Economists have cut their forecasts for Canadian government bond yields and the policy lending rate as a weaker U.S. outlook and growing risk from Europe’s sovereign-debt crisis threatens Canadian economic growth.

The median forecast for the Bank of Canada’s target rate for overnight loans was reduced 25 basis points in the second, third and fourth quarters of 2012, bringing it to 1.5 percent by the end of next year, according to a monthly Bloomberg News economist survey released today. Forecast yields on government bonds are also lower, which would extend last quarter’s record rally.

“Most of the downward revisions in GDP may be due to a deterioration in financial conditions in the U.S. and Europe,” said Rudy Narvas, an economist at Societe Generale SA in New York. “Slower growth in these areas means an easing in the pace of the Canadian expansion.”

Growth in the world’s 10th largest economy is expected to decelerate this year and in 2012, and Bank of Canada Governor Mark Carney has said there’s less need to lift borrowing costs. The central bank kept its main interest rate unchanged for an eighth meeting last month amid Europe’s financial crisis and the slow U.S. rebound.

A Bloomberg Global Poll showed that 60 percent of respondents see the U.S. economy deteriorating, and 50 percent said it will relapse into recession in the next year. Nineteen percent forecast another financial crisis in that period, according to the survey of 1,031 investors, analysts and traders who are Bloomberg subscribers. Over the next two to five years, an additional 26 percent expect a crisis. Canada ships almost three-quarters of its exports to the U.S.

Lower Yields

Yields for Canadian three-month treasury bills, 2-year notes, 10- and 30-year bonds are all forecast to be lower now than in August. The survey, taken Sept. 22-29, covers the period from the third quarter until the first quarter of 2013.

Elsewhere in credit markets, the extra yield investors demand to hold the debt of Canada’s companies rather than its federal government widened to 185 basis points yesterday, or 1.85 percentage points, compared with 183 basis points on Sept. 30. Yields fell to 3.45 percent as of yesterday, from 3.48 percent on Sept. 30.

Canadian corporate bonds returned 1.19 percent last month compared with a decline of 0.13 percent for U.S. company debt, according to Bank of America Merrill Lynch data.

Rogers Upgrade

Moody’s Investors Service yesterday raised Rogers Communications Inc.’s senior unsecured debt rating to Baa1, from Baa2, on expectations the Toronto-based company will continue to record strong financial performance while maintaining a conservative financial profile.

Canadian government bonds returned 1.97 percent last month, compared with the 1.6 percent gain for U.S. government debt and the 1.06 percent rise for sovereign debt of Group of Seven nations, according to Bank of America Merrill Lynch data.

Yields on 10-year Government of Canada bonds fell three basis points to 2.03 percent today. The difference between yields on 10-year Canadian government bonds and U.S. Treasuries of the same maturity narrowed by 1 basis points to about 30 basis points.

In the provincial bond markets, yields were 71 basis points higher than federal debt as of yesterday, unchanged from Sept. 30. Merrill’s broad Provincial Bond Index debt has returned 8.9 percent this year after climbing 1.94 percent last month.

2-Year Yields

In the survey, 2-year yields are forecast to rise from 1.15 percent at the end of the year to 2 percent at the end of 2012. In the August survey, the 2-year yield was projected to rise from 1.20 percent to 2.35 percent over the same period.

Yields on the 30-year bond are now forecast to rise from 2.85 percent at the end of 2011 to 3.36 percent at the end of next year. That compares with the prior forecasts of 3.26 percent and 3.71 percent respectively. Bond yield fell nine basis points to 2.69 percent yesterday.

The September survey predicted the Canadian central bank’s key rate will rise to 1.5 percent from the current 1 percent rate by the end of next year, with the first increase in the third quarter of 2012. In the prior survey, the rate was forecast to begin rising in the second quarter and to reach 2 percent by the first quarter of 2013.

Investor Forecasts

This contrasts with investor forecasts, which call for rate cuts as soon as this year. Investors have priced in a 60 percent chance of a rate cut as early as the bank’s Dec. 6 announcement, based on overnight index swap trading.

The market is “getting a little ahead of itself,” Societe Generale’s Narvas said. “At times, the market sticks too much to old dogmas, such as if the U.S. slows the Canadian economy is in deeper trouble. Over the past 11 years the Canadian economy has been much more resilient to US business cycles than history would suggest.”

Market sentiment could swing quickly if the Europe situation is resolved or if the U.S. economy receives a large boost from government stimulus, he said.

Canada’s economic growth is forecast to slow to 2.2 percent this year and 2.1 percent in 2012, according to the survey. That’s 0.2 percentage points below the August forecast for both years. The Bank of Canada estimates economic growth will slow to 2.6 percent next year from 2.8 percent this year.

“My downgrade was all based on the global economic outlook,” said Sheryl King, head of Canada economics at Bank of America Corp. in Toronto. “The international outlook is being driven by the risk aversion in the financial markets, where risk aversion is causing a negative feedback loop into the economy.”

Excerpts of Bloomberg survey. Forecasts are for end of period.

--Editors: Paul Badertscher, Dave Liedtka

To contact the reporters on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Ilan Kolet in Ottawa at ikolet@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net David Scanlan at dscanlan@bloomberg.net


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