* Foreign investment hits record C$26.11 billion
* Foreigners buy C$16.67 billion of bonds, most in 3 years
* Canada increasingly seen as a haven amid world turmoil
By David Ljunggren
OTTAWA, July 16 (Reuters) - Foreign investment in Canadian securities hit a record high in May on heavy buying of its higher yielding government debt, a sign of Canada's growing role as a safe haven during global economic turmoil.
Canada, which boasts stronger fiscal and economic fundamentals than most developed Western economies, said non-residents bought C$26.11 billion ($25.60 billion) of stocks, bonds and money market paper in May, well above the previous C$22.88 billion record from May 2010.
That reflected both higher interest rates in Canada and intensifying economic problems elsewhere.
"The strong inflows into Canadian assets happened at the same time as euro zone tensions re-intensified. This strengthens the argument that Canada is gradually becoming a safe-haven," Charles St-Arnaud of Nomura Global Economics said in a research note.
"The majority of the flow was into bonds rather than money-market instruments, signaling that investors are comfortable with Canada's long-term outlook."
AAA-rated Canada emerged from the global financial crisis in better shape than most other developed nations, a draw to investors worried about economic problems in Europe and the patchy U.S. recovery.
In May, long-term Canadian interest rates exceeded those in the United States by the most since September 2011, Statistics Canada said. At the same time, the Canadian dollar depreciated against the U.S. dollar to the lowest level since September 2011.
Analysts said the foreign interest has helped support the Canadian dollar, which hit a record high against the euro on Monday. It rose to C$1.2362 to the euro, or 80.93 euro cents, its strongest level since Europe's common currency was created in January 1999.
A stronger Canadian dollar keeps Canadian inflation and borrowing costs low. But it also makes Canada's exports more expensive at a time when the manufacturing base is struggling.
Statistics Canada said foreigners bought C$16.67 billion of Canadian bonds in May, the most since May 2009. Of that, C$9.47 billion were federal government bonds mainly purchased on the secondary market.
"While the Canadian market does not benefit from the same safe haven status afforded to the United States, a steady diversification in economic exposure towards emerging market economies and superior fiscal fundamentals enhances the appeal of Canadian dollar assets," TD Securities strategist David Tulk said in a note to clients.
"We expect this theme of strong foreign interest in Canadian securities will help to restrain government yields and support the currency."
Canada's debt market will never compete with the U.S. one in terms of scale and liquidity. But because Canada raised interest rates as its economy recovered from the crisis, much of its government debt yields more than that of other major economies.
Canada's two-year bond yielded 0.95 percent on Monday, well above the 0.23 percent yield of its U.S. equivalent. The yield on Germany's two-year bond has actually gone negative due to inflows triggered by the euro zone crisis.
The spread between Canadian and U.S. two-year bonds traded at some of their widest levels of the year in early May.
Statistics Canada said nonresidents also bought C$7.35 billion worth of money market instruments in May. By the end of May, those holdings hit a record C$69.89 billion.
Despite May's overall figures, total foreign investment in Canadian securities in the first five months of 2012 fell to C$42.32 billion from C$45.66 billion a year earlier.
Canadians purchased a more modest C$1.32 billion worth of foreign securities in May, buying C$1.72 billion of stocks and C$442 million of bonds while reducing their holdings in money market instruments by C$844 million.