20000122Canadian bonds end down after volatile session

TORONTO: Canadian government bonds ended down after another day of volatile but essentially directionless trading on Thursday.

"It's up and down, and the market's going nowhere, basically, which is not really a surprise," said Rob Palombi, fixed-income analyst at Standard & Poor's MMS.

Uncertainty about the extent of interest-rate tightening from the US Federal Reserve in coming months is continuing to weigh on North America's fixed-income markets, making advances difficult to sustain.

Canada's benchmark 30-year bond due June 1, 2027, lost 51 Canadian cents to C$119.62 to yield 6.461 percent.

The US long bond was down 6/32 to yield 6.735 percent. The negative spread between the two totalled 27.4 basis points after trading at 29.3 basis points at the previous close.

While the negative yield spreads between the long bonds in Canada and the US narrowed on Thursday, spreads actually became more negative in the mid-section of the curve.

Trading remained fairly choppy in Canadian bonds, with the 30-year bond, which outpaced the curve in early trading, falling behind the pack late in the morning and putting in a highly variable performance during the rest of the day.

Trading volumes in Canadian bonds were fairly substantial on Thursday.

"A lot of the volume we've been seeing in the past couple of sessions has been in the shorter and immediate maturities," Palombi said, noting that the long end also recorded heavier volumes than in the last few days.

News that Canada's trade balance rose to C$3.1 billion in November, exceeding the C$2.9 billion consensus forecast, had limited impact on the Canadian curve on Thursday morning.

The US Treasury market was weaker on Thursday, but recovered from earlier lows suffered after news that the US trade deficit once again climbed to record levels.

Bond market players remain undecided about how much the US Federal Reserve will hike interest rates at its policy-setting open market committee meeting on February 1-2.

"The commentary coming out of the Fed, from Fed officials, has been on the hawkish side, but the bond market has been reluctant to price in more than a 25-basis-point hike, and the money market, as well, for the February FOMC meeting," Palombi said.

"I think there's a stalemate between policy makers and the market. The market really wants to get a better idea of what the Fed is up to, and won't really know that until we see the outcome of the FOMC meeting and the accompanying statement," he added.

The two-year bond due December 1, 2001, was down 2 Canadian cents to C$98.31 with the yield at 6.230 percent.

Canada's three-month when-issued treasury bills yielded 5.17 percent, unchanged from Wednesday's 5.17 percent close.

Canadian consumer price index data for December will be released on Friday. Analysts expect the overall rate to rise by 0.1 percent from the previous month and 2.5 percent on a year-on-year basis, while the core rate, which excludes the volatile food and energy sectors, is seen rising by 1.7 percent year-over-year.

In supply news, Hydro Quebec offered a C$500 million, 5-year floating rate note at C$99.757. The issue will pay interest at 5 basis points above the rate for 3-month bankers' acceptances.

In addition, the Government of Canada announced that it would auction C$2.6 billion of 10-year bonds on January 26. -Reuters