20000206Canada bonds languish at lower level after jobs data

TORONTO: Canadian government bonds ended lower in moderately heavy trading on Friday as the market absorbed the impact of stronger-than-expected jobs data in the U.S. and Canada and consolidated after extraordinary gains earlier in the week.

"We've corrected a little bit from yesterday," said Jeoff Hall, managing analyst at Thomson Global Markets. The Canadian benchmark long bond, due 2027, lost C$1.00 to C$124.19 to yield 6.158 percent.

The U.S. 30-year T-bond lost 42/32 to yield 6.234 percent. The negative spread between the two long bonds was at 7.6 basis points, from 6.9 at Wednesday's close.

Bond markets dipped sharply after news early in the session that U.S. nonfarm payrolls surged by a larger-than-expected 387,000 in January. They recovered for a short period, and then slumped again.

In Canada, employment grew by 44,300, outpacing expectations, while the unemployment rate remained steady at 6.8 percent.

After the volatile performance early in the session, North American bond markets languished at weaker levels for the balance of trading.

"At the long end in Canada, we're looking for some price consolidation," Hall said. "I don't think there's anything that dramatic."

Most of the activity was concentrated in the belly of the curve, Hall said, as players bought five-year bonds as opposed to 10-years. Trading volumes were heavy in two-year and five-year bonds, he added.

The five-year issue was at attractive levels compared to the rest of the curve, Hall said. "They even look relatively cheap versus the U.S.," he added.

The atmosphere remained nervous in North American bond markets after the convulsive moves earlier in the week, observers said.

"The human energy level in this market is pretty low after this week," said one Toronto bond trader.

The burst of bond market strength earlier in the week has not encouraged any corporate issuance in Canada, and many market players see the rally as technically driven and likely to be short-lived, Hall said.

"Most people would consider it a counter-trend rally, owing more to technicals and supply considerations. Corporate issuers are not convinced that these are attractive levels to issue, or in a volatile environment like this they don't want their issue to fall flat on its face," he said.

Canadian market players have also been shifting terms in their corporate bond portfolios, he added. "Some of what you've seen in the last few days is re-adjusting their portfolios to get out of some longer-dated corps, into some longer-dated (provincials) and into some shorter-dated corps," Hall said.

"Some (corporate and provincial) spreads are widening and finding buyers, other spreads are widening and still without finding sponsorship," he said.

The Canadian curve was outperforming the U.S. in most maturities on Friday. Continued outperformance at the long end resulted in further inversion of the two-year to 30-year curve.

Canada's two-year bond was down 12 Canadian cents at C$98.28, for a yield of 6.264 percent. The three-month when-issued was at a yield of 5.19 percent, up from Thursday's close at 5.16 percent.-Reuters