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OTTAWA, Feb 27 (Reuters) - Canada is cutting down issuance of bonds in the 2018-19 fiscal year by 17 percent as the government runs a smaller budget deficit and market participants demand greater supply of more liquid T-bills.
Bond issuance had increased by as much as 48 percent since 2015-16 as the Liberal government under Prime Minister Justin Trudeau ran deficits in an effort to support Canada's economy, which had been impacted by an oil-price shock.
But issuance is projected to fall to C$115 billion in 2018-19 from an estimated C$138 billion in the prior fiscal year, the government's Debt Management Strategy said on Tuesday.
The government is increasing issuance of T-bills to C$138 billion in 2018-19 from C$125 billion in 2017-18 in response to feedback from market participants, the report said.
T-bills are often used as collateral for short-term borrowing in money markets.
The Debt Management Strategy, which sets out the government's borrowing plans for the coming fiscal year, was released with the federal budget on Tuesday.
The budget projected a deficit of C$19.4 billion for 2017-18, after projecting a deficit of C$28.5 billion a year ago. It forecasts further narrowing in the deficit to C$18.1 billion in 2018-19.
Canada is one of the few countries with an undisputed triple A credit rating. Its bonds are greatly sought after by international investors.
Even as the government satisfies the liquidity demand of the market it could be missing an opportunity to lock-in historically low long-term yields.
Canada is not likely to benefit from reduced borrowing costs going forward, said Robert Kavcic, senior economist at BMO Capital Markets.
The Bank of Canada has raised its benchmark interest rate three times since July to 1.25 percent, while money markets expect two further rate hikes this year. Earlier this month, Canada's 10-year yield touched its highest since May 2014 at about 2.40 percent.
Cuts to benchmark bond target ranges are planned for some maturities, the report said, and there will be fewer 3-year auctions.
Issuance of ultra-long bonds, those with a term to maturity of more than 40 years, will continue, subject to favorable market conditions, the report added.
The government sold these bonds in August, and then again in November, for the first time since November 2014. It had plans to sell further ultra-long bonds in February but decided not to proceed with the issue.
Separately, the government announced its intention to remove from circulation the C$1, C$2, C$25, C$500 and C$1,000 notes, which are not widely used. (Reporting by Fergal Smith)