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Canada bonds up, long bond outperforms US

TORONTO: Canadian government bonds ended higher in moderate trading on Monday, taking direction from the US market, but significantly outperforming US treasuries at the long end of the curve.

"There seems to be obviously, a bit stronger market tone here than the US," said Frank Hracs, head of fixed-income research at T.D. Securities Inc.

The Canadian benchmark long bond, due 2027, gained 87 Canadian cents to C$125.59 to yield 6.068 percent.

The US 30-year T-bond gained 17/32 to yield 6.231 percent. The negative spread between the two long bonds was at 16.3 basis points, from 14.7 at the previous day's close.

"We're following the lead of the US market, but otherwise a pretty uneventful day," said one Canadian bond trader.

"We saw small buying this morning, but nothing out of the ordinary. I think it's a Street that's kind of flat, doesn't have too much going, and the buying just gave the guys a bid and they scrambled for bonds," the trader added. "There has been some buying of Canada, and the Street probably didn't own a whole lot of bonds, so they're chasing it here."

One fixed-income strategist said positive technicals were attracting momentum traders to the Canadian long end.

Canadian issuers were busy announcing or issuing new bonds on Monday, but confined their activities entirely to foreign currency-denominated bonds. The Province of Quebec issued a 150 million euro, six-year bond, according to Standard & Poor's MMS, while the Province of Manitoba announced its intention to issue a US$500-million bond in the coming sessions, its first ever US dollar global.

The strong tone on Monday may also reflect a continuation of the market's advances Friday, some market watchers said.

"All this seems a bit peculiar ahead of all the economic data and the Fed commentaries this week, said T.D.'s Hracs.

US Federal Chairman Alan Greenspan delivers his semiannual Humphrey-Hawkins congressional testimony on Thursday. Also scheduled for release in the United States this week are industrial production and capacity utilization data on Tuesday, the producer price index for January on Thursday, and the consumer price index Friday. Trade data for December will be released in both Canada and the United States Friday, while Canadian manufacturing data for the same month is due out Tuesday.

On Wednesday, the Bank of Canada releases the update to its semiannual monetary policy report at 10:30 a.m. (1530 GMT), and Governor Gordon Thiessen holds a news conference on the update at 11:30 a.m. (1630 GMT).

The Canadian market put in a mixed performance against the US, outperforming at the long, but lagging in other maturities. Domestically, the strong showing in long bonds pushed the two-year to 30-year spread further into negative territory, taking it to 7.4 basis points at the close of trading on Monday.

Canada's two-year bond was up 3 Canadian cents at C$98.50, for a yield of 6.142 percent.

The three-month when-issued T-bill was at a yield of 5.09 percent, unchanged from the previous day's close.

Wider corporate yield spreads, particularly at the long end of the curve, may deter potential corporate bond issuers from launching new issues in the coming sessions, one Canadian fixed-income manager said.-Reuters