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Canada bonds end up as market players wait for Fed

TORONTO: Canadian government bonds ended higher in tranquil trading on Monday as market players stayed on the sidelines in advance of the US Federal Reserve's policy-setting meeting on Tuesday.

The Canadian benchmark long bond, due 2027, gained 44 Canadian cents to C$131.10 to yield 5.728 percent.

In the US, the 30-year T-bond gained 10/32 to yield 5.984 percent. The negative yield spread between the two long bonds was at 25.6, from 25.1 at the previous session's close.

After the Fed makes its intentions known on Tuesday, the focus for Canadian bond market participants is whether the Bank of Canada will match the Fed if, as widely expected, the US central bank raises interest rates by 25 basis points at the end of its open market committee meeting on Tuesday afternoon.

Most analysts are convinced that the Canadian central bank will match such a move by its US counterpart at its next regular policy window at 9:00 a.m. (1400 GMT) on Wednesday.

"There's unanimous opinion that the Bank of Canada is going to be raising rates," said Rob Palombi, senior fixed-income economist at Standard & Poor's MMS.

"The economy has proven that it's really not slowing down. Both in the Canada and the US, the economic releases have consistently been coming in on the strong side," he added.

"Almost every primary dealer in the US is predicting a 25-basis-point increase. If they do anything more, I think the long end will rally," said one Toronto fixed-income portfolio manager. "If for some unknown reason they decide not to do anything, then the market will be very, very shocked and will probably sell off," he added.

The Canadian market outperformed the US through most of the yield curve on Monday, a move some market watchers attributed to last week's underperformance in Canada.

On a somewhat longer-term basis, supply dynamics could tend to favour Canada in the coming weeks, with the Bank of Canada's quarterly auction schedule complete and new government of Canada issuance in abeyance for a few weeks, some market watchers said.

Canadian bonds outperformed their US counterparts through most of the yield curve on Monday.

Trading was quiet on Monday, with a Japanese market holiday contributing to thin trading conditions.

The Canadian short end underperformed the long end on Monday, pushing the negative yield spread between two-year and 30-year bonds to 24.9 basis points from 22.9 at the previous session's close.

Canada's two-year bond gained 2 Canadian cents to C$99.53, for a yield of 5.977 percent.

In money markets, the three-month when-issued T-bill yielded 5.26, up from 5.25 percent at the previous session's close.

In supply news, Bank of Nova Scotia has opened the order book on an issue of "BaTS" trust securities that is expected to price Wednesday. Market talk puts the spread over the government of Canada curve at 140 to 144 basis points, the portfolio manager said.

Also in supply news, Honda Canada Finance has filed a preliminary prospectus for a securitization issue referred to as "Secured Automobile Asset-backed Bonds," or SABS, from Honda Asset Receivables Trust, according to Thomson Global Markets.-Reuters