Canada's Bonds Advance on `Uncertainty' Over U.S. Bailout Plan

By Chris Fournier

Oct. 1 (Bloomberg) -- Canada's bonds rose on speculation the $700 billion rescue package meant to help financial institutions may not prevent the U.S. from falling into a recession.

Gains in two-year government securities erased about one- fifth of yesterday's declines as the Senate set a vote for tonight on the plan. The U.S. is Canada's biggest trading partner.

``There's a massive uncertainty on what the bailout package is going to look like, if it gets passed,'' said James Dutkiewicz, lead portfolio manager of C$5 billion ($4.7 billion) in fixed-income assets at CI Mutual Funds in Toronto. He is buying government debt. ``You're getting significant price fluctuations in bonds.''

The 10-year note's yield dropped 2 basis points, or 0.02 percentage point, to 3.73 percent at 2:43 p.m. in Toronto. The price of the 4.25 percent security maturing in June 2018 climbed 16 cents to C$104.15. Yesterday the price fell the most since 1996 when the yield gained 25 basis points.

The yield on the two-year government bond declined 4 basis points to 2.74 percent. It gained 22 basis points yesterday. The price of the 2.75 percent security due in December 2010 rose 8 cents to C$100.04.

`Tension Across the Globe'

``Tension across the globe is causing panic in the markets,'' said Martin Lefebvre, a senior economist at Montreal's Desjardins Group, Quebec's largest credit union. He predicts the yield on the 10-year note will be 3.35 percent by year-end.

The 10-year bond yielded 99 basis points more than the two- year security, up from 81 basis points on Sept. 19. The spread is the widest since March.

The steepening yield curve means ``the market is expecting that the financial difficulties will have repercussions for the real economy,'' Lefebvre said. He forecast the spread will be 95 basis points by the end of this year, unless the Bank of Canada cuts rates, which would push the spread to 110 basis points.

The central bank left borrowing costs unchanged at 3 percent on Sept. 3.

The Canadian dollar climbed for the first time in three days, rising as much as 0.9 percent to C$1.0547 per U.S. dollar, from C$1.0644 yesterday. It last traded at C$1.0620. One Canadian dollar buys 94.15 U.S. cents.

``The risk of further softening in commodity prices together with possible fallout for Canada from a renewed weakening in the U.S. economy and an Asian downturn makes us less'' bullish on the Canadian dollar, wrote Robert Sinche, head of global currency strategy at Bank of America Corp. in New York, in a note yesterday.

Crude oil for November delivery fell 2.2 percent to $98.46 a barrel.

`Risks to U.S. Developments'

``While the domestic economy retains momentum and the financial system appears sound, Canada's risks to U.S. developments mark a significant vulnerability going forward,'' wrote Morgan Stanley analysts led by Sophia Drossos in New York. ``Persistently high risk aversion is also often hostile to commodity-linked currencies. We think this makes for an unfavorable outlook for the'' Canadian dollar in the weeks ahead.

The loonie, as Canada's currency is known because of the aquatic bird on the one-dollar coin, will slip to C$1.13 against the U.S. dollar by the end of 2009, according to the median forecast in a Bloomberg News survey of economists.