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Canada bonds close weaker awaiting US data

TORONTO: Canadian government bonds reversed direction before the market close on Thursday after rising in early dealings as market players nervously eyed important US economic numbers due out on Friday.

"We are giving back a large portion of yesterday's gains as we head into some key data in the US," said Rob Palombi, senior fixed-income analyst, Standard & Poor's MMS International. "The market is taking a defensive posture."

Market players are awaiting gross domestic product data for the fourth quarter, which analysts polled by Reuters expect to show a 5.1 percent increase. In the previous quarter GDP rose 5.7 percent.

The numbers will be closely watched for a display of brisk expansion which could lead to a greater-than-anticipated rate hike by the US central bank next week.

The Canadian benchmark long bond, due 2027, fell 58 Canadian cents to C$121.97 on Thursday to yield 6.303 percent.

By contrast the US 30-year T-bond gained 20/32 to yield 6.523 percent.

Palombi pointed to this week's news -- that the US government could pay back its publicly held national debt earlier than expected -- as the factor buoying the US long end.

The negative spread between the two totalled 22 basis points after 29.5 basis points at the previous close.

Canadian traders had been on the edge of their seats ahead of comments by Bank of Canada Governor Gordon Thiessen, who spoke to the Metropolitan Halifax Chamber of Commerce on Thursday.

He signalled that the central bank is ready to slowly raise interest rates in an effort to head off inflation without jeopardising Canada's robust economic growth.

The nation's top central banker added that information received since the bank's November policy report suggested the Canadian economy may be expanding more rapidly than previous thought.

Palombi said that market investors had shrugged off Thiessen's remarks, as they had anticipated a hawkish stance.

By Thursday's finish Canada's two-year dipped 14 Canadian cents to C$98.42, for a yield of 6.17 percent.

The three-month when-issued closed at a yield of 5.18 percent.-Reuters