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Canada bonds down, long bonds outpace short end

TORONTO: Canadian government bonds ended down on Tuesday, with the long end of the yield curve outperforming the weakening US Treasuries market while the short end underperformed.

Canada's benchmark 30-year bond due June 1, 2027, lost 37 Canadian cents to C$119.41 to yield 6.475 percent.

The US long bond lost 20/32 to yield 6.750 percent. The negative spread between the two totalled 27.5 basis points after trading at 24.9 basis points at the previous close.

The long end was more effective than the short end in withstanding the negativity spilling out of the US market, market watchers said.

"We've been like a rock around 6.50% here," said Sheldon Dong, a fixed-income strategist at Merrill Lynch Canada, referring to the yield levels for the long end of the Canadian yield curve.

The solid interest accorded to a new corporate issue from the Royal Bank on Tuesday revealed the buying appetite in the Canadian market, Dong said.

"There are people that want to buy bonds out there, the only stumbling block is the US," he said. "The biggest drag on the Canadian market is the US bond market."

The Royal Bank announced a C$500 million issue of subordinated debentures on Tuesday. The debentures, issued under the bank's medium-term note programme, have a fixed interest rate of 7.10 percent per annum until January 25, 2010, when the rate shifts to the 90-day BA rate plus 1.00 percent until maturity on January 25 this year.

"The initial talk size-wise was around C$300 million and the demand just swelled up," Dong said. "That shows the underlying strength of the Canadian bond market."

The Canadian yield curve continued to flatten, with the spread between 10-year and 30-year issues pushing further into negative territory.

"That, to me, is an indication that investors are getting more positive that this cycle is coming to an end," said Dong.

A looming shortage in long bonds could push the inversion at the long end of the curve even further, he added.

"Canada is underperforming the US in the front end and short end, but outperforming toward the back end of the curve," said Jeoff Hall, managing analyst at Thomson Global Markets.

The two-year bond due December 1, 2001, was down 10 Canadian cents to C$98.36 with the yield at 6.191 percent.

Canada's three-month when-issued treasury bills yielded 5.19 percent, up substantially from Monday's 5.07 percent close.

The tepid reception to the Government of Canada's auction of C$3.8 billion of 3-month Treasury bills was a primary source of pressure on the money market, Hall said.

"The auction wasn't a smashing success, so we've seen rates really kind of blast higher here this afternoon," Hall said.

The C$1.8 billion of 6-month and and C$1.8 billion of 1-year bills also auctioned on Tuesday were re-openings of outstanding maturities and benefited from some buying by banks, he said. "The 3-month was sort of an orphan, so people we're willing to let that one go," Hall said. "It's apparent that it was not an aggressively bid auction."

The province of Ontario also auctioned C$100 million of 3-month Treasury bills, with an average yield of 5.13 per cent.-Reuters