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Canada bonds up, long maturities outperform short

TORONTO: Canadian government bonds ended higher on Wednesday, with the entire curve substantially outperforming the US, but volumes remained thin and no significant new directions emerged, analysts said.

"It's pretty much still caught in a range," said Mark Chandler, senior economist at Goldman Sachs in Toronto.

Canada's benchmark 30-year bond due June 1, 2027, rose C$1.01 to C$122.40 to yield 6.275 percent.

The US long bond was up 19/32 to yield 6.591 percent. The negative spread between the two totalled 31.6 basis points after 29.5 basis points at the previous close.

The release of US employment cost index data on Friday -- originally scheduled for Thursday but delayed by bad weather -- along with gross domestic data on the same day are the next significant milestones for North American bond markets.

"I think that's the next thing that will provide direction ahead of the FOMC meeting," Chandler said.

The continuing buoyant tone in the Canadian dollar was helping the market outperform the US market, he added.

"The currency is still doing well - commodities are still doing well - that appears to be the dominant factor," Chandler said.

The Government of Canada's auction of C$2.6 billion ($1.8 billion) of 10-year bonds on Wednesday was reasonably well received by the markets. The average yield was at 6.541 percent, with a 0.3 basis point tail to 6.454%. The bid-to-cover ratio of 2.317 was slightly stronger than the last 27 auctions of 10-year issues, according to Thomson Global Markets.

In other supply news, the Province of Ontario added 8 billion yen to an outstanding 10-year, 1.875 percent bond at yield of 19 basis points above a comparable Japanese government bond, bringing the total outstanding to 25 billion yen.

The Canadian curve flattened markedly on Wednesday as the long end outperformed shorter maturities.

Canada's two-year bond due December 1, 2001, was unchanged at C$98.55 with the yield at 6.089 percent on Wednesday.

Three-month when-issued treasury bills yielded 5.16 percent, after trading at 5.15 percent at Tuesday's close.

Bank of Canada Governor Gordon Thiessen is set to speak to the Metropolitan Halifax Chamber of Commerce on Thursday.

Chandler said he expects Thiessen to signal a tightening bias, but with no explicit commitment as to whether the Bank of Canada will match the US Federal Reserve if it raises interest rates.

"I don't think that the tone will change that much," he said, adding that the speech will likely be a continuation of themes touched on by the Bank of Canada Deputy Governor Charles Freedman in a speech in Ottawa on Tuesday.-Reuters