Canada Buys C$2.34 Bln of Mortgages to Aid New Loans (Update2)

By Greg Quinn

Feb. 20 (Bloomberg) -- The Canadian government bought C$2.34 billion ($1.86 billion) of mortgages from banks, less than the C$7 billion it offered to buy, as part of a program to purchase as much as C$125 billion of the securities and encourage new bank lending.

Canada Mortgage and Housing Corp., a state-run agency, announced the purchase today on its Web site. The transaction is aimed at helping banks fund new loans to consumers and businesses.

Finance Minister Jim Flaherty began the program in October with a plan to buy just C$25 billion of mortgages. It has expanded as Canada and other members of the Group of 20 nations promised further action to fight the biggest global credit crunch in decades.

Today’s result “is a sign that bank financing conditions may be improving,” said Roger Quick, director of fixed income research at Scotia Capital in Toronto.

Today’s agreement is for five years, and the government will earn an average yield of the one-month Canadian Dealer Offered Rate plus 0.763 percent. Today’s so-called CDOR rate is 0.95 percent, meaning the yield today would be 1.713 percent.

That’s less than the government’s cost of borrowing money for five years, with today’s yield on the benchmark Canada bond at 2.03 percent.