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Canada bond yields drop to 2016 lows as growth stability doubted

A Bay Street sign, the main street in the financial district is seen in Toronto, January 28, 2013.

Mark Blinch / Reuters

Canadian bonds rose, sending yields down to levels seen last year, as fresh concerns about the global recovery raised questions about the sustainability of Canada's growth.

Debt rallied worldwide on Tuesday amid fading confidence in the ability of the U.S. administration to push through growth-supporting policies and mounting geopolitical concerns over North Korean missile tests and the outcome of a looming French election. In Canada, traders looked past a flurry of positive economic data and comments last week from Bank of Canada Governor Stephen Poloz, who took an interest rate cut off the table.

The yield on Canada's two-year federal government note fell below 0.7 percent for the first time since November, while the rate on the country's 10-year bond slipped eight basis points, the steepest decline since June, to a five-month low of 1.44 percent.

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"I'm not as much a champion for Canada as perhaps shorter term balance gives us credit for," said Scott Colbourne, co-chief investment officer at Sprott Asset Management in Toronto. "When you look at longer-term trends there are some serious issues," such as the country's dependence on short-term capital flows and the size of its debt, he said. "People who look at Canada should be tempered in their enthusiasm."

The oil-producing nation, which was hurt by falling crude prices over the past two years, grew at an annualized pace of almost 4 per cent in the first quarter, according to the Bank of Canada. That's the fastest growth among other Group-of-Seven economies.

Despite the improving outlook, the probability of an interest-rate increase by the end of the year fell to 18 percent on Tuesday from 32 percent a week earlier, according to overnight index swaps data compiled by Bloomberg. That was a day before Poloz said the central bank's approach to monetary policy has become "decidedly neutral."

The Canadian dollar fell 0.5 per cent to $1.3377 per U.S. dollar at 2:22 p.m. in Toronto, paring its gain this year to 0.5 per cent, the worst performance among Group-of-10 peers.

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