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Canada bonds end mixed in ho-hum trading

TORONT0: Canadian government bonds closed mixed on Monday, with the short end retaining its earlier gains but the long end slumping lower in lackluster trading.

Trading in Canadian bonds was light, and market sources said the primary influence on the market was the sluggish US market, where an atmosphere of normalcy was beginning to prevail after the supply-driven volatility of last week.

Market players were once again turning their attention to the continuing signs of strength in the US economy after investing much of their energy last week in chasing after long bonds on fears of impending scarcity, observers said.

"I guess it's just a sense of pessimism with the firmer data that we've seen from last week just spilling over," said Mark Chandler, senior economist with Goldman Sachs Canada.

The Canadian benchmark long bond, due 2027, dropped 75 Canadian cents to C$123.14 to yield 6.226 percent.

The US 30-year T-bond lost 27/32 to yield 6.339 percent. The negative spread between the two long bonds was at 11.3 basis points, from 7.6 at the previous day's close.

Canadian bonds managed to outperform US Treasuries across the yield curve. Some of that may have been attributable to early strength in the Canadian dollar, analysts said, but the currency subsequently lost some ground.

"I think it may have been mitigated by the strength in the currency over the last little while. But in the end, I just think more and more people are fearful of what the Fed is going to have do," Chandler said.

New supply is also an issue, with the US Treasury auctioning a total of $32 billion this week, and the Government of Canada auctioning C$2.8 billion of 5-year bonds on Wednesday.

"It's the supply issue this week, as well, that's causing the bond market to be a little bit lower," Chandler said.

Trading volumes were moderate on Monday. The Canadian curve was puting in a mixed performance against the US on Monday, with Canada's negative spreads widening in 2-year and 30-year issues as those bonds outperformed Treasuries.

Canada's 2-year bond was up 4 Canadian cents at C$98.31, for a yield of 6.247 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.

On the corporate supply front, additional issuance under the Hollis Receivable Term Trust is possible some time fairly soon, said one Toronto fixed-income portfolio manager.

The trust recently filed a preliminary prospectus for three series of receivables-backed notes. The document does not provide any details about the size or exact timing of the issues.

Demand for corporate product remains relatively strong despite recent volatility in fixed-income markets, the manager added. -Reuters