Record-low Canadian yields seen hurting C$, pensions, aiding gov't

By Fergal Smith and Matt Scuffham
TORONTO, Jan 19 (Reuters) - A plunge in Canadian bond yields
to record lows is seen further undermining the country's
struggling currency and increasing the funding challenges for
its pension plans, even as it offers welcome savings to
cash-strapped governments.
Canada's 10-year government bond yield CA10YT=RR touched
an all-time low of 1.143 percent on Monday, well below the yield
of more than 2 percent US10YT=RR for its U.S. counterpart, as
a drop in oil to its lowest price since 2003 darkened the
country's economic outlook.
Oil's move also knocked the Canadian dollar to a 12-year low
on Monday. Traders have increased bets in recent sessions that
the Bank of Canada will cut interest rates on Wednesday to
support the economy, a prospect that has driven bond prices
higher.
Analysts said the resulting lower yields add to downside
risks for the Canadian dollar by reducing the allure of Canadian
assets for foreign investors.
"Relative to the U.S. and some other countries we're
offering less attractive returns and that just puts downward
pressure on our currency," said Sal Guatieri, senior economist
at BMO Capital Markets.
Low government bond yields also make it harder for Canadian
pension funds to meet their long-term obligations to the
country's aging population, raising concerns some plans could
experience shortfalls.
"Various jurisdictions in Canada have provided temporary
funding relief to defined benefit pension funds in recognition
of the stressed environment," said David Zanutto, Canadian
Director of Strategic Research at consultancy Mercer.
"If this relief ends and low rates persist, a number of plan
sponsors could face significant difficulty."
Canada's 10 biggest pension plans, which manage over C$1
trillion of assets, have been moving funds out of fixed income
securities into riskier asset classes such as infrastructure and
real estate. However, some say those markets are in danger of
becoming overheated.
The big winner from the bond yield trends remains
government. Canada's debt service charges as a percentage of
revenue had already hit a record low 9.4 percent, according to
government data. And the government's most recent fiscal update
in November assumed a 2.5 percent 10-year bond rate for 2016,
more than twice the current level.
The federal and provincial governments "are locking in some
pretty attractive long-term rates," said Darcy Briggs, a
fixed-income portfolio manager with the Bissett unit of Franklin
Templeton Investments.
Still, the declining yield environment reflects a
deteriorating economic climate which will hit government
revenue. Some analysts say this adds to the case for more
stimulus spending.
Canada's Liberal government won last October's federal
elections on the back of a promise to run C$10 billion deficits
to help offset the oil price shock. Sources familiar with the
party's plans have said they now look certain to run even higher
deficits. by Jeffrey Hodgson and Alan Crosby)