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Canada bonds down as Fed fears overshadow market

TORONTO: Canadian government bonds ended down on Tuesday as worries about interest-rate increases from the US Federal Reserve continued to cast shadows over North American bond markets.

Canada's benchmark 30-year bond due June 1, 2027, lost 59 Canadian cents to C$119.48 to yield 6.472 percent.

The US long bond lost 33/32 to yield 6.669 percent. The negative spread between the two totalled 19.7 basis points after trading at 15.4 basis points at the previous close.

The US market tumbled after fears about higher interest rates were intensified by comments from Richmond Federal Bank President Alfred Broaddus on Monday. Broaddus said the risk of the US economy overheating is rising and that the Fed must act "pre-emptively" to control inflationary pressures.

Market players are awaiting a speech by Fed Chairman Alan Greenspan on Thursday for further insight into the US central bank's intentions.

The Canadian market managed to resist the full effect of the downdraft in US treasuries, although some market watchers were puzzled by the Canadian curve's relative resilience.

"Canada/US is a tough one to figure out. You could say it's a directional trade. I think there's definitely been some buying in Canada, because it seems that any time the US shows any support, Canada picks up faster," said Robert Marcus, senior portfolio manager at Altamira Management Ltd.

Market players are more prone to sell US treasuries in down markets because they're more liquid, he added.

But the potential for Canadian outperformance may soon be exhausted, Marcus suggested. "I don't know how much is left in it. I would think at some point you have to be wary of the yields you're giving up in Canada as opposed to the US," he added.

Marcus said bond yields generally are at levels that should elicit investor interest. "Long yields are attractive at this level, and I do believe that by yearend they'll be lower than they are now, but you have to have something to cause positive momentum," he said.

It will likely take tighter monetary conditions from the US Federal Reserve and definitive signs that the US economy is slowing down before the bond market's overall direction changes, he said.

Trading volumes in Canadian bonds remained moderate Tuesday, market watchers said.

The Canadian curve flattened as the long end outpaced shorter maturities on Tuesday.

"I think that is the expectation going forward, for the curve to flatten both in Canada and the US," Marcus said.

The two-year bond, due December 1, 2001, lost 9 Canadian cents to C$98.44 with the yield rising to 6.120 percent.

Canada's three-month when-issued treasury bills yielded 5.10 percent, up from 5.08 percent on Tuesday.-Reuters