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Canada bonds down, defensive positioning seen

TORONTO: Canadian government bonds ended mixed but mostly lower on Tuesday, as players responded to strong economic data and positioned themselves defensively ahead of testimony by central bankers in both the United States and Canada later this week.

"I guess we could lay the blame on the U.S. industrial production report, and looking ahead, defensive posturing on what Governor Thiessen and Chairman Greenspan might say on policy," said Rob Palombi, fixed-income economist at Standard & Poor's MMS.

The Canadian benchmark long bond, due 2027, was unchanged at C$125.62 to yield 6.070 percent.

The U.S. 30-year T-bond lost 9/32 to yield 6.247 percent. The negative spread between the two long bonds was at 17.7 basis points.

The Canadian market underperformed the U.S. in most maturities, but the Canadian 30-year long bond significantly outperformed its U.S. counterpart.

U.S. industrial production jumped 1.0 percent in January, exceeding the forecast 0.6 percent rise. In Canada, manufacturing shipments for December were up 1.3 percent over the previous month, surpassing analysts' expectations of a 1.0 percent increase.

On Wednesday, the Bank of Canada releases the update to its semiannual monetary policy report, followed by a news conference by Governor Gordon Thiessen.

U.S. Federal Chairman Alan Greenspan delivers his semiannual Humphrey-Hawkins congressional testimony on Thursday.

"If you look forward to Thursday's and Friday's numbers and testimony from Humphrey-Hawkins, you realise the power of numbers and speech are far greater to hurt you than they are to allow you to rally this market," said one Toronto bond trader.

The U.S. producer price index for January will be released on Thursday, followed by the consumer price index on Friday.

Trade data for December will be released in both Canada and the United States on Friday.

The market was fairly lethargic on Tuesday, the trader said. "It was a little bit busy on the back of a few derivative deals, but on the real money side, pretty quiet," he said.

The relatively strong showing in long bonds pushed the two-year to 30-year spread further into negative territory, taking it to 10.2 basis points from 7.4 basis points at the close of trading on Monday.

Canada's two-year bond was down 5 Canadian cents at C$98.45, for a yield of 6.174 percent.

The three-month when-issued T-bill was at a yield of 5.12 percent, up from the previous day's close at 5.10 percent.

In supply news, the Province of Manitoba priced a $500 million, 10-year global bond -- its first ever -- at 98 basis points above the U.S. Treasury curve.-Reuters