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Canada bonds end up, US data, weak equities cited

TORONTO: Canadian government bonds ended higher across the curve on Friday as the short end caught up with the gains posted by the long end after favourable US consumer price data early in the session.

Investment flows from deflating North American equity markets also helped pump up bond market gains in thin trading on Friday, market watchers said.

The Canadian benchmark long bond, due 2027, gained C$1.40 to C$127.96 to yield 5.920 percent.

The US 30-year T-bond gained 29/32 to yield 6.155 percent. The negative spread between the two long bonds was at 23.5 basis points, from 21.4 at the previous session's close.

Semi-annual Humphrey-Hawkins testimony on Thursday from US Federal Reserve Chairman Alan Greenspan, despite its hawkish tone, did not fundamentally alter the market's view of monetary policy direction at the US central bank, some analysts said.

Combined with news that the US consumer price index rose by a weaker-than-expected 0.2 percent in January, the policy backdrop for North American bonds was relatively benign on Friday, analysts said.

"(Greenspan's testimony) was all about eventualities -- what would happen if things don't slow down, and so on," said Mark Chandler, senior economist with Goldman Sachs Canada. "We, for example, haven't changed our rate forecast, which is 50 basis points in the first half," he added.

"We stand on guard was the tone of the speech, but in the end what people say is that we have to watch the data closely. And recently the data's been fairly benign," he added.

Friday's market-friendly CPI data followed the release of softer-than-expected US producer price index data on Thursday.

Canada outperformed the US across the yield curve, but volumes were thin in both markets in response to an early market close in the United States in advance of the Presidents' Day holiday on Monday.

"We're also getting a snowstorm in Toronto and that probably will see some people leave earlier than usual," one Toronto analyst said.

The irrepressible long bond outpaced shorter maturities on Friday, but the margin of outperformance narrowed as the day progressed.

Canada's two-year bond was up 11 Canadian cents at C$98.46, for a yield of 6.174 percent.

The three-month when-issued T-bill was at a yield of 5.15 percent, down from the previous day's close at 5.19 percent.

In supply news, the Hollis Receivables Term Trust, an asset-backed issue expected to be priced next week, will comprise four tranches totalling about C$1.26 billion, according to Thomson Global Markets.-Reuters