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Canada bonds close higher, long end outperforms

TORONTO: Canadian government bonds ended higher across the yield curve on Tuesday as North American bond markets benefited from favourable US productivity data and a positive technical outlook, market watchers said.

Trading in Canadian bonds remained light on Tuesday, and the surging US market was the primary influence on Canadian bonds.

The Canadian benchmark long bond, due 2027, gained C$1.51 to C$124.68 to yield 6.126 percent.

The US 30-year T-bond gained 47/32 to yield 6.227 percent. The negative spread between the two long bonds was at 10.1 basis points, from 11.8 at the previous day's close.

While North American bonds opened strong, they got a significant boost at 8:30 a.m. when it was reported that non-farm productivity in the US surged at its fastest pace in seven years, climbing by 5.0 percent in the fourth quarter.

Third quarter productivity growth was revised up to 5.0 percent from 4.9 percent. Fourth quarter non-farm unit labour costs dropped 1.0 percent, from a revised third-quarter decline of 0.3 percent.

The data helped fixed-income markets build on early gains, but were not indispensable, said Sheldon Dong, fixed-income strategist with Merrill Lynch Canada.

"I think they woke a lot of people up. Those are fantastic numbers for bonds, but I don't know if the bonds needed that excuse to rally," he said. "Technically, everything's looking very positive. If you believe that the long bond yields peaked last month, you're basically buying weakness, which is what we've seen in the past couple of days," he added.

"Basically, the numbers this morning confirm that the central banks are ahead of the inflation curve. I guess that's pretty much optimistic for the long end of the bond market," Dong said.

The buoyant tone in bond markets has not prompted any corporate issuers to step forward with new issues in recent sessions, and there still does not appear to be any issues in the pipeline in coming sessions, market watchers said.

"The volatility in the last little while has gotten a lot of people sort of shell shocked," Dong said.

Bond market volatility has created a confusing outlook for corporate spreads in recent sessions, another factor helping forestall new corporate supply, he added.

The Canadian market put in a mixed performance against US Treasuries on Tuesday, with the long end lagging the US while middle-date maturities outperformed slightly.

The Canadian yield curve flattened as the long bond significantly outpaced shorter maturities.

Canada's 2-year bond was up 3 Canadian cents at C$98.35, for a yield of 6.220 percent.

The three-month when-issued T-bill was at a yield of 5.10 percent, down from the previous day's close at 5.15 percent.-Reuters