20000218Canada bonds up, trading quiet despite BOC report

TORONTO: Canadian government bonds ended slightly higher on Wednesday, after a day of relatively quiet trading despite the release of a monetary policy report update by the Bank of Canada.

Trading was fairly subdued, and bond traders seemed to be hovering on the sidelines, waiting for US Federal Reserve Chairman Alan Greenspan's semi-annual Humphrey-Hawkins testimony on Thursday.

"I think the market's basically pausing for breath here ahead of Humphrey-Hawkins and the PPI," said Doug Porter, senior economist with Nesbitt Burns Inc.

US producer price index data are scheduled for release on Thursday morning, with consumer price numbers on Friday.

Canada's benchmark long bond, due 2027, gained 17 Canadian cents at C$125.84 to yield 6.052 percent.

The US 30-year T-bond lost 4/32 to yield 6.256 percent. The negative spread between the two long bonds was at 20.4 basis points, from 18.5 at the previous session's close.

"The day started out on a fairly downbeat tone because of the surprisingly bearish housing starts report, but it didn't seem to carry any lasting demons with it ahead of Mr. Greenspan," Porter said.

The US Commerce Department reported on Wednesday that there were a total of 1.78 million housing starts in January, exceeding the expected 1.65 million.

The release of the update to the Bank of Canada's semi-annual monetary policy report helped propel the Canadian dollar higher on Wednesday, but it ceded some of its gains as the day progressed.

The currency's wobbly performance has been another source of pressure on Canadian bonds lately, Porter said.

"No question, the Bank of Canada's review was a little bit on the hawkish side," Porter said. "You get the sense that with each passing month, they're becoming a little bit more concerned about the inflation outlook and how strong growth is."

Bank officials said they expected all-items inflation to approach 3 percent early this year, and added that they see gross domestic product growth at the upper half of the bank's previously announced 2.75 percent to 3.75 percent range for the year.

Canadian bonds outpaced the US yield curve at the long end, but put in a mixed showing across the rest of the curve.

"We outperformed here again today by a couple of beeps at the long end, but in the belly of the curve it looks like we're underperforming big time here," said Hank Cunningham, managing director of fixed-income with Correspondent Network.

While there were some islands of activity in the market on Wednesday, trading volumes were not heavy, observers said.

"On the retail side, we're really writing a ton of sales orders, but the big flows are not there," Cunningham said.

In supply news, Bell Canada is working toward the pricing of a six-year, retail-oriented Canadian dollar issue with a target amount of about C$200 million, market sources said.

The relatively strong showing in long bonds pushed the two-year to 30-year spread further into negative territory, taking it to 12.3 basis points from 10.8 basis points at the previous session's close.

Canada's two-year bond was unchanged at C$98.45, for a yield of 6.175 percent.

The three-month when-issued T-bill was at a yield of 5.14 percent, down from the previous day's close at 5.15 percent.-Reuters