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Canada bonds close lower, lag U.S. treasuries

TORONTO: Canadian government bonds closed moderately lower across the curve on Monday, underperforming U.S. treasuries due to a pervasive lack of buying interest in the Canadian market, analysts said.

"It's been very quiet today," said Sheldon Dong, fixed-income strategist at Merrill Lynch Canada.

The Canadian benchmark long bond, due 2027, lost 20 Canadian cents to C$130.39 to yield 5.770 percent.

In the U.S., the 30-year T-bond gained 7/32 to yield 5.977 percent. The negative yield spread between the two long bonds was at 20.7, compared with 23.4 at the previous session's close.

North American bond markets slipped lower in early trading on Monday as they continued the corrective phase that began on Friday, market watchers said.

U.S. treasuries managed to pare their losses as the session progressed and U.S. equity markets slid lower, sending investment flows into fixed-income assets, market watchers said.

But with Canadian equity markets holding their ground more effectively than their U.S. counterparts, Canadian bonds didn't enjoy the same kind of recovery that their U.S. equivalents did, market watchers said.

The Toronto Stock Exchange composite 300 index was down 9.68 points to 10,043.0 at the end of trading on Monday, while the Dow Jones Industrial Average was down 86.87 points to 11,025.8.

"The TSE has hung in pretty darn good, so you might want to draw a loose relationship there," Dong said.

North American bond markets were bound to experience a correction after their robust performance in the previous weeks, Dong said.

"Technically, we were overdue for this correction. I pretty much expect the bond market to go sideways for the next couple of weeks," he said. "Friday was probably one of the first indications we've had that the bond market is going through a bit of a corrective phase," he added.

Trading volumes were quiet on Monday, reflecting in part the approach of the end of the first quarter later in the week, market watchers said.

"We're getting close to quarter end, so I don't anticipate a lot of portfolio managers will be taking big shots at the market," Dong said.

Merrill Lynch doesn't see yield on the benchmark government of Canada 30-year bond going above 6.00 percent level in coming weeks, he said. "That's not going to be too damaging," he added.

The release of final U.S. gross domestic product growth data for the final quarter of 1999 on Thursday and Canadian GDP data for January on Friday will likely be the next major developments for North American fixed income markets, Dong said

"I hope everyone realises that this revision to Q4 (U.S. GDP) is going to be a really high number," Dong said, adding that Merrill Lynch is expecting GDP growth to be at 7.2 percent at annual rates in the fourth quarter.

The short end outperformed the long end on Monday, pushing the negative yield spread between the two-year and 30-year bonds to 21.7 from 23.7 at the previous session

Canada's two-year bond gained 1 Canadian cent to C$99.51, for a yield of 5.987 percent.

In the money markets, the three-month when-issued T-bill yielded 5.30, unchanged from the previous session's close.

In supply news, three deals were priced by NHA Secured Trust, according to Thomson Global Markets. A C$65-million, three-year deal was priced to yield 39 basis points over a comparable government of Canada bond, a C$45 million, four-year issue was priced at a 42-basis-point spread, and a C$40.3 million, five-year issue was priced to yield 45 basis points over a comparable government of Canada bond, Thomson Global Markets said.

BLC Securities was lead manager on all three issues.

Credit spreads continued to tighten in somewhat on Monday, continuing the process begun on Friday when then overall market began to weaken, Dong said.-Reuters