20000330Canada bonds end down after federal budget

TORONTO: Canadian government bonds ended mixed but mostly down on Monday, showing little response to a stimulative federal budget delivered at the end of the trading day.

"There does not seem to be any surprises out of the debt budget," said one Toronto-based bond salesman.

The Canadian benchmark long bond, due 2027, was unchanged at C$128.64 to yield 5.878 percent.

The US 30-year T-bond lost 21/32 to yield 6.189 percent. The negative spread between the two long bonds was at 31.1 basis points, from 26.4 at the previous session's close.

The long end was volatile on Monday, fluctuating significantly throughout the session, appearing to move independently of the rest of the curve, which remained depressed during most of the session.

Although already significantly lower, most of the yield curve slumped slightly after the release of the budget.

The fact that the government elected to stick to its earlier approach of allocating only the C$3 billion annual contingency reserve to debt reduction, may have added somewhat to the pressures on the bond market on Monday, some market watchers said.

"I think we may have had a more positive (market) response if we'd been surprised in terms of debt reduction," said Paul Ferley, assistant chief economist at the Bank of Montreal.

But continued economic growth in Canada over the next few years should result in a sustained reduction in the debt-to-GDP ratio, Ferley added, and that will be positive for the bond market on a longer-term basis.

"That's a slight positive for the bond market, so I think that prevents any deterioration in bonds coming out of this budget statement," he said.

The ratio is expected to fall to 55 percent in 2001 from 71 percent in 1995, according to Thomson Global Markets.

The budget cuts taxes by at least C$58 billion over the next five years, and sees programme spending at C$116 billion in the 2000-01 fiscal year. Revenues are pegged at C$162 billion.

Trading volumes in Canadian bonds were light on Monday, the Toronto bond trader said.

"It was extremely light. I had two tickets, today, whoopee," the bond salesman said.

The yield spread between the two-year and 30-year bonds flattened on Monday, moving to negative 6.4 basis points from a positive spread of 4.7 at Friday's close.

Canada's two-year bond was down 19 Canadian cents at C$98.86, for a yield of 5.878 percent.

The three-month when-issued T-bill was at a yield of 5.08 percent, unchanged from the previous day's close.-Reuters