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Canada bonds end mostly lower after volatile session

TORONTO: Canadian government bonds ended mixed but mostly lower on Wednesday after a volatile session that saw bond prices tumbling from earlier highs across most of the curve, market sources said.

A flurry of new corporate supply and surging crude oil prices were also cited as a source of pressure on Canadian bonds on Wednesday.

"Canadian bonds are fickle. They go up, look like they're going somewhere, and then all of a sudden somebody pulls the rug out from under you," said one Canadian bond salesman.

Canada's benchmark 30-year bond due June 1, 2027, gained 34 Canadian cents to C$120.13 to yield 6.426 percent.

The US long bond was up 12/32 to yield 6.719 percent. The negative spread between the two totalled 29.3 basis points after trading at 27.5 basis points at the previous close.

Canadian bonds were significantly higher earlier in the session, with the long bond up about 60 Canadian cents and the rest of the curve in positive territory, but dipped sharply lower midway through the afternoon. The long bond significantly outperformed the rest of the curve and was the only maturity that managed to post gains at the end of the day.

The flurry of new supply was one source of pressure on the Canadian market, which underperformed the US in most maturities, the bond salesman said.

Loblaws Co. issued a C$200 million ($138 million), five-year bond priced to yield 43 basis points over a comparable government bond on Wednesday, while Westcoast Energy was said to be planning a 10-year, medium-term note issue of between C$100 million and C$150 million.

Canadian issuers were also active in global bond markets on Wednesday.

Underlying market weakness may have also contributed to the market's shift lower on Wednesday afternoon, he added. "I'm not bullish on the market, I guess I'm more surprised to see the market spike up than when it drops," the salesman said.

"Perhaps people again are focusing on the jump in oil. We are testing US$29, the cycle high, on the front crude contract," said Marcel Kasumovich, associate economist at Goldman Sachs Canada.

"I guess the volatility makes sense when you look at all the different things that have been driving the bond market over the last little while," he added, citing stock market gyrations and commodity prices as recent drivers of bond market action.

"All the while you've got the lingering threat of further tightening down the road and underlying firm momentum in the domestic economy," he added.

In Canada, it was reported that manufacturing shipments increased by 1.8 percent in November - exceeding the expected 1.5 percent climb - while unfilled orders declined by 0.4 percent.

The two-year bond due December 1, 2001, was down 3 Canadian cents to C$98.34 with the yield at 6.204 percent.

Canada's three-month when-issued treasury bills yielded 5.17 percent, down from Tuesday's 5.19 percent close.

Despite new and looming supply, spreads for corporate bonds have tightened in recent sessions, the bond salesman said.

"Corporate credits are really, really snapping right in," the salesman said, adding that spreads have tightened by 5 to 8 basis points recently depending on the credit.

In addition to the Loblaws and Westcoast issues, 407 International Inc. is planning a new issue soon, which is expected to range between C$200 and C$300 million in size and mature December 1, 2039.

The deal is an inflation-linked "real return bond" that will repay principal on an amortizing basis.

Canadian-based issues in the global market included the Royal Bank's issue of a $500 million, 5-year floating rate global bond, and the Bank of Montreal's $500 million, five-year floating rate note, according to Thomson Global Markets.

The Canadian Mortgage and Housing Corporation issued a C$500 million, five-year global bond. The issue was priced at C$99.99, and yielded 60 basis points over the US Treasury note maturing in November 2004.-Reuters