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TORONTO, Feb 23 (Reuters) - The Bank of Canada said on Monday it will start to accept highly rated eligible corporate bonds as collateral in its new term purchase and resale agreement (PRA) facility for private-sector instruments, which is designed to increase financial system liquidity.
The bonds will be included in a program that until now had bought only private-sector money market instruments such as certain types of commercial paper, asset-backed commercial paper, bankers' acceptances and promissory notes.
Eligible securities for transactions will now include Canadian dollar-denominated corporate bonds with a minimum long-term issuer credit rating of A (low) by Dominion Bond Rating Service, or A- by Standard and Poor's, or A3 by Moody's Investors Service.
"The motivation for the program would appear to be to encourage the use of the Term PRA program, which had attracted no bids at the last auction on Feb. 17," Eric Lascelles, chief economics and rates strategist at TD Securities, said in a research note.
"Simultaneously, by allowing corporate bonds, it could -- and appears to have -- created a bid for corporate bonds, which might help to rein in corporate bond spreads to the general benefit of the economy."
The 14-day term PRA for private-sector money market instruments on Monday also failed to attract bids with a minimum bid rate at 1.610 percent.
Consultations with market participants will be sought this week on the new program, the central bank said. Final details, including the schedule of operations to be conducted up to June 2009, will be announced after consultations are complete.
The bank aims to conduct the private sector term PRA operations on Tuesdays. (Reporting by Ka Yan Ng; Editing by Peter Galloway)
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