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Canada benefits from flight to quality

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Canada's sale of 10-year government bonds met with solid demand on Wednesday, helped by anxiety over the stalemate in U.S. debt ceiling talks that has whet investors' appetite for safer-haven assets.

The $2.5 billion auction of bonds produced an average yield of 2.994 percent, down from 3.211 percent at the last 10-year bond auction in May.

"In the broader context of risk aversion, people are still somewhat skeptical over a timely resolution over the debt ceiling impasse and the result of that, you still have the slight flight-to-quality flow," said Ian Pollick, fixed-income strategist at RBC Capital Markets.

"On top of that, it also had to do with supply/demand dynamics ... that all culminated into a really successful auction."

The auction came amid the deadlock between the White House and Republican lawmakers to increase the statutory $14.3 trillion US borrowing limit ahead of an August 2 deadline, which pounded global stocks for a third straight day on Wednesday.

The more than $6.1 billion in bids from Canadian primary dealers resulted in a bid-to-cover ratio of 2.458, up slightly from 2.448 percent at the previous auction.

The ratio is a gauge of investor appetite, and a reading above 2 generally implies a decent result.

The auction was the first sale of a new series of bonds due June 1, 2022. It is not expected to become the benchmark until the first or second quarter next year as it grows in size.

"Going into the auction, relative to what we typically see in sizes, this was a relatively smaller auction," added Pollick.

"Tens actually looked somewhat richer on the curve, but if you think about it more in terms of the cycle, this is the last big duration grab in the cycle, so people kind of needed that duration."

The bonds, which carry a coupon of 2.75 percent, and will be issued on August 2. The outstanding debt of the issue after the auction is $2.5 billion.

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