(c) 2013, Bloomberg News.

(c) 2013, Bloomberg News.

TORONTO, Canada Canadian inflation-linked debt has gone from the worst-performing in the world to the best as Bank of Canada Governor Stephen Poloz seeks to spur consumer prices to boost growth.

Linkers, whose payments rise and fall with the rate of inflation, gained 2.6 percent this month, paring annual losses to 8.7 percent, still the steepest among global peers, according to Bank of America Merrill Lynch. Canadian linkers led the global performance of real-return securities in the month through Oct. 29, the data show. Inflation-linked debt compensates holders for rising consumer prices through higher principal payments.

"With rising real yields, you've just seen demand for them coming in," Ed Devlin, head of the Canadian portfolio at Pacific Investment Management Co., the world's biggest manager of bond funds, said by phone from London. "Probably we'll see a bit more volatility going forward given what Poloz said on spot trends in the consumer price index."

Unlike predecessor Mark Carney, Poloz is becoming more worried about the risks of low inflation, explaining his Oct. 23 decision to abandon a bias towards higher rates was prompted by the risk of undershooting an inflation target of 2 percent. Carney broke with Group of Seven counterparts by including the so-called tightening bias as part of his policy in April 2012, and policy makers retained the stance at every meeting until the one last week.

Inflation will remain less than the Bank of Canada's 2- percent target until the end of 2015, two quarters longer than forecast in July, the central bank said this month. The consumer-price index has held below 2 percent for 17 straight months, Statistics Canada data show.

"Most people realize Canada has an inflection period and wants to get back to inflation of 2 percent," Devlin said.

Pimco's Canadian Total Return Bond Fund managed by Devlin increased its allocation to inflation-linked notes to 5 percent Sept. 30, from 4 percent at the end of August, according to the most recent filings. It increased nominal Canadian government bonds to 40 percent from 38 percent over the period and reduced foreign holdings to 2 percent from 5 percent.

Elsewhere in credit markets, the extra yield investors demand to own the debt of investment-grade corporations rather than government decreased four basis points from Sept. 30 to Wednesday, when it was 123 basis points, or 1.23 percentage points, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields dropped to 3.08 percent, from 3.25 percent on Sept. 30.

The premium investors demand for provincial debt compared to federal benchmarks fell two basis points over the month to 71, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index. Yields declined to 2.91 percent, from 3.05 percent.

Corporate debt has gained 1.1 percent this year, compared with losses of 1.5 percent for provincial debt and 1.3 percent for federal-government securities.

In the month through Oct. 30, company bonds returned 1.1 percent, while provincial peers gained 1.3 percent and government bonds 0.9 percent.

The yield of Canada's 4.5 percent inflation-linked note due December 2021 tumbled to 0.3 percentage point yesterday from a 2013 peak of 0.86 percentage point on Sept. 10. A similar- maturity TIPS note due January 2022 dropped to 0.19 percentage point from 0.79 percentage point on Sept. 5.

Canada's performance in the linker market this month was trailed by the U.K., which gained 2.3 percent. U.S. TIPS rose 0.9 percent, according to the Merrill Lynch Global Inflation- Linked Government Index.

Linkers have beaten Canadian nominal government bonds every year since 2009, returning 96 percent during the past decade, compared with 65 percent for government bonds, Merrill Lynch index data show.

"I bought them when there were cheap, and they got cheaper," Devlin said. "Now they're getting back to levels that make sense."

_ With assistance from Greg Quinn in Ottawa.

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