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Canadian bonds end up as equity markets collapse

TORONTO: Canadian government bonds ended significantly higher across the curve on Monday, but the move up came in relatively light trading and reflected market flows and technical factors rather than an improved overall tone, market watchers said.

Collapsing equity markets were another major factor helping prop up bond markets on Monday, observers said.

"It's going to be dominated by flows and supply/demand and technicals and charts and all that good stuff for the next little while," said Hank Cunnigham, managing director of fixed-income with Correspondent Network.

The substantial gains on Monday do not suggest a more positive direction in bond markets, he added.

"It's still a bear market until proven differently," Cunningham said. "We're not out of the woods yet."

Canada's benchmark 30-year bond due June 1, 2027, was up 91 Canadian cents to C$120.84 to yield 6.380 percent.

The US long bond was up 20/32 to yield 6.649 percent. The negative spread between the two totalled 26.9 basis points after trading at 26.2 basis points at the previous close.

Spreads against the US bonds moved in different directions across the curve on Monday, but headed further into negative territory in most maturities.

Remarks by Federal Reserve Bank of Atlanta President Jack Guynn, who said he did not want to see US inflation rise much higher, did not significantly affect the US Treasury market, observers there said.

Buying interest was focused on the longer end of the Canadian curve, Cunningham said.

"There's been some term extension in Canada at the longer end," he said. "In the States, the Fed looks like it's going to buy back the longer-dated, off-the-run issues, and that's sort of put the emphasis on the long end as the outperforming place to be."

Bond market players remain awash in extra cash, he added. "There's so much cash on the sidelines," Cunningham said.

No new corporate supply is in evidence in the next few days, but the supply front will likely be busy in coming weeks, he added.

The two-year bond due December 1, 2001, was up 16 Canadian cents to C$98.55 with the yield at 6.090 percent.

Canada's three-month when-issued treasury bills yielded 5.14 percent, down from Friday's 5.16 close.-Reuters