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Canada bonds up across the curve after Fed rate move

TORONTO: Canadian government bonds ended higher on Wednesday, with a reassuring performance by the U.S. Federal Reserve helping to boost shorter maturities while the long end rallied with the U.S.

"The hike was pretty much as advertised - the Fed only went 25 (basis points), and actually the statement was probably a little more on the dovish side than people were expecting," said Rob Palombi, senior fixed-income economist with Standard & Poor's MMS. "They're acknowledging that risks are skewed to higher inflation, they're not really signalling any heightened worries of that."

The Fed's announcement after it increased the federal funds target rate and the discount rate by 25 basis points emphasised the possibility of inflationary pressures in the U.S. economy. "The committee (open market committee) remains concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth," the Fed said in a statement.

The Canadian benchmark long bond, due 2027, gained C$1.39 to C$123.74 to yield 6.187 percent.

The U.S. 30-year T-bond gained 52/32 to yield 6.303 percent. The negative spread between the two long bonds was at 11.6 basis points, from 15.6 at Tuesday's close.

Analysts believe the Bank of Canada will likely match the Fed's increase with a 25-basis-point hike in its bellwether bank rate, possibly at its window for monetary policy changes on Thursday morning.

"It's clear that most G10 central banks are looking at raising interest rates, and we expect the Bank of Canada to follow with a 25-basis-point move. The debate is what happens next, and I would still say that the bank is not as eager as the U.S. Fed is to raise interest rates," Palombi said.

The Canadian long bond was outperforming the rest of the curve on Wednesday, surging by about C$2.00 along with the U.S. long end in morning trading before ceding some of its gains later in the session.

The outperformance in the long end came primarily in response to the U.S. Treasury's announcement that it was reducing issuance of 30-year bonds and would be proceeding with its previously announced debt buyback programme, analysts said.

The healthy performance of longer bonds relative to the rest of the curve also suggests market players believe central banks will be able to keep inflation under control, Palombi said.

"The market is taking a fairly benign view of the longer-term outlook for inflation," he said.

Overall, the Treasury announcement conveys the message of a shrinking supply of government bonds in the U.S., said Jim Dunlop, managing director of North American fixed income with Crown Trust.

The U.S. Federal Reserve's as-expected interest-rate increase was reassuring for bond markets, he said. "The hike by the Federal Reserve has been exactly as we expected," Dunlop said.

The market's closing levels are encouraging from a technical perspective, he added. "Technically, it looks like it's in fairly good shape," Dunlop said.

The Canadian market put in a mixed performance against the U.S., with the long end lagging the U.S.

The substantial outperformance in the long end resulted in further flattening for the Canadian curve. The 2-year to 30-year curve inverted during the session, with the yield for the 2-year bond pushing 2.2 basis points below the 30-year's.

Canada's 2-year bond was up 1 Canadian cent at C$98.32, for a yield of 6.228 percent.

The three-month when-issued was at a yield of 5.25 percent, down from Monday's close at 5.27 percent.-Reuters