Financial Update

Bond rates have increased 37 points in the month of May. Originators should prepare for higher interest rates.

RBC Capital Markets is now predicting no rate cut by the Bank of Canada on June 10, citing, higher commodity prices, higher currency, and rising inflation since the last rate cut on April 22. Rates have already started to increase in the Australian market, which typically trends ahead of the Canadian market.

Take advantage of our market leading fixed rates….Before it is TOO LATE!!.
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Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html

Canadian Bonds Fall Amid Speculation Banks to Stop Rate Cuts

By Haris Anwar

May 29 (Bloomberg) -- Canada's bonds declined, pushing the two-year's yield to the highest in more than three months, amid speculation the Bank of Canada and U.S. Federal Reserve will stop cutting borrowing costs.

Government securities fell for a fourth day as interest- rate futures suggested traders were reducing bets on rate cuts. Canada's central bank lowered the target lending rate by a half- percentage point to 3 percent on April 22 to shield the economy from a U.S. economic slowdown. Borrowing costs have been lowered four times since December from 4.5 percent.

``The Bank of Canada won't cut rates on June 10,'' said Mark Chandler, a senior fixed-income strategist in Toronto at RBC Capital Markets, a unit of Canada's largest bank. ``We can see a further upward pressure on short-term yields if that is the case. Higher commodity prices, a strong currency and rising inflation are going against the case for more rate cuts.''

The yield on the two-year Canadian government bond rose 2 basis points, or 0.02 percentage point, to 3.12 percent at 12:49 p.m. in Toronto. It reached 3.16 percent, the highest since Feb. 26. The yield has increased 37 basis points this month.

The price of the 3.75 percent security due in June 2010 fell 5 cents to C$101.23.

10-Year Yield

The 10-year government bond's yield increased 3 basis points to 3.72 percent. The price of the 4 percent security due June 2017 fell 23 cents to C$102.16. The yield is up 13 basis points this month.

Fed Bank of Dallas President Richard Fisher said the central bank will raise the benchmark interest rate if inflation expectations increase. Canada ships about 80 percent of its exports to the U.S.

Bankers' acceptances futures contracts for September rose to 2.99 percent, from 2.64 percent on May 20. The futures have settled at a three-month lending rate averaging 16 basis points above the central bank's target since Bloomberg started tracking the data.

``The Bank of Canada can still afford to cut rates, but the magnitude of the cutting is likely to be scaled back,'' said Eric Lascelles, chief economist and rates strategist at TD Securities Inc. in Toronto, a unit of Canada's second-largest bank. ``The bank may signal a pause after a 25-basis-point cut on June 10. Unattractive yields and capital losses'' are making the government bond market an unfriendly place. ``The recent sell-off may be difficult to fight.''

Futures Contracts

Futures contracts on the Chicago Board of Trade show 98 percent odds the Fed will keep borrowing costs at 2 percent during its next meeting on June 25. The odds were 94 percent yesterday.

The 10-year bond yielded 60 basis points more than the two- year security, down from 109 basis points on March 17.

Canada's two-year bond yield will touch 2.90 percent by the end of this year, with the 10-year yield reaching 3.82 percent, according to the median forecast in a Bloomberg survey.

Canadian government bonds have returned 2.7 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries during the same period returned 1.5 percent.

Canada's dollar rose 0.2 percent to 98.82 cents per U.S. dollar, from 99.01 cents yesterday. One Canadian dollar buys $1.0120. Canada's dollar has strengthened 2 percent so far this month, making it the best performer against the 16 most-active currencies.

U.S. Economy

The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record. The 0.9 percent gain in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent.

``As the market becomes less concerned about the downside risk in the U.S., that would also suggest less downside for the Canadian side,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``That bodes well for the Canadian dollar.''

Bank of America predicts Canada's currency will peak at 98 cents per U.S. dollar in the second quarter and decline to C$1.03 in the first quarter of 2009.

The loonie, as the currency is known because of the image of the bird on the one-dollar coin, has traded near parity with its U.S. counterpart this year after climbing 17 percent in 2007. It touched a 2008 low of C$1.0379 on Jan. 22, and a high of 97.12 cents per U.S. dollar on Feb. 28.

The currency reached 98.20 cents per U.S. dollar on May 21, the strongest since March 14.
Canada's dollar will decline to C$1.08 by the first quarter of 2009, according to the median forecast of 38 analysts in a Bloomberg survey