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Canada bonds end lower, early rally short-lived

TORONTO: Canadian government bonds ended lower across the curve on Friday after an early rally inspired by soft US inflation data proved unable to vanquish deep-seated negative sentiment in the market.

North American bond prices initially jumped after news that the US consumer price index rose by just 0.2 percent in December, while the core inflation index, which excludes food and energy, edged up only 0.1 percent.

But the gains proved short-lived and North American bond markets surrendered their early advances as the day progressed and the market's bearish tone reasserted itself.

"This morning it was tough to keep the market up," said Jeoffrey Hall, managing analyst with Thomson Global Markets.

Subsequent indicators were not as encouraging. The short-covering activity prompted by the friendly CPI statistics gave way to position-squaring and diminished liquidity as US trading approached an early close in advance of the Martin Luther King. Jr. Day holiday on Monday.

Canada's benchmark 30-year bond due June 1, 2027, lost 31 Canadian cents to C$119.75 to yield 6.453 percent.

The US long bond lost 14/32 to yield 6.690 percent. The negative spread between the two totalled 23.7 basis points after trading at 22.0 basis points at the previous close.

A Toronto bond salesman characterised the morning's upturn as a "a short-term, short-covering push."

"There's no reason to get too excited on the buyside. If there is bounce in the bond market it will only be short-lived," the salesman said, adding that the yield on the benchmark 30-year US Treasury bond could rise to 7.00 percent in the coming weeks. Trading volumes in Canadian bonds escalated notably on Friday, Hall said.

"There's a lot of activity in the two- and five-year areas of the curve," he said. "It almost gets you thinking that liquidity is starting to step into this market and that we're starting a new year," he said.

Canada outperformed the US through most of the curve on Friday.

The two-year bond due December 1, 2001, was down 6 Canadian cents to C$98.44 with the yield at 6.142 percent.

Canada's three-month when-issued treasury bills yielded 5.07 percent, unchanged from Thursday's close.-Reuters