20000305Canada bonds end mixed, short end outperforms long

TORONTO: Canadian government bonds ended mixed but mostly higher on Friday after softer-than-expected US jobs data for February was released early in the session on Friday.

Although the bond-friendly data helped ease concerns about the extent of interest-rate tightening from the US Federal Reserve, it was not enough to prompt a major market rally.

Most of the trading activity was concentrated in curve-steepening trades, with players moving out of the long end and back into shorter-dated maturities, market watchers said.

The Canadian benchmark long bond, due 2027, was down 11 Canadian cents at C$129.50 to yield 5.825 percent.

The US 30-year T-bond gained 1/32 to yield 6.130 percent. The negative spread between the two long bonds was at 30.5 basis points, from 31.1 at the previous session's close.

The Canadian curve underperformed at the long end, but outperformed the US through most of the curve.

US nonfarm payrolls grew by just 43,000 jobs in February, considerably fewer than the 206,000 forecast. Average hourly wage gains in the United States were also subdued, rising by only 0.3 percent.

Both the US and Canadian markets climbed from mildly negative territory into positive terrain after the release of the US data. Although the response was relatively muted, as market players still believe the US Federal Reserve will tighten rates in March, the data may have helped quell fears that the US central bank will increase rates by 50 basis points instead of 25.

"The number was totally unexpected. It takes the heat off the Fed to raise more than 25 (basis points)," said Sheldon Dong, fixed-income strategist with Merrill Lynch Canada.

"We still think they're going to go 25 (basis points), but there's a lot of speculation they're going to go 50," he added.

Trading remained fairly light in the Canadian bond market on Friday. The most pronounced reaction to the soft jobs data was found in US equity markets on Friday, Dong said.

"I would say that the bigger story is the effect on the stock market," he said.

The primary effect of the news on Friday was to instigate curve steepening trades, reversing flattening trades put on earlier in response to fears about more extensive tightening from the US Federal Reserve.

"The front end is actually outperforming the back end slightly, so people are unwinding the curve flatteners," he said.

The market's subdued reaction to the jobs data also reflects the market's desire to see more data pointing to an economic slowing in the United States," he added.

"No one really believes that that number is going to produce a new trend. It's more of an aberration than anything else. That's why the bond market didn't rally that much," he said. "You can't base things off of one month's worth of data."

Potentially influential events for the Canadian bond market next week include the release of February employment data on Friday and a speech by Bank of Canada Governor Gordon Thiessen in New York on Thursday entitled "The conduct of monetary policy when you live next to a large neighbour."

"That's certainly going to be interesting," Dong said.

In supply news, the province of Saskatchewan issued a C$250 million, seven-year bond with a 6.25 percent coupon priced at C$99.098 to yield 25 basis points over a comparable Government of Canada bond.

Canada's two-year bond was up 7 Canadian cents at C$98.84, for a yield of 5.958 percent.

In money markets, the three-month when-issued T-bill was at a yield of 5.10 percent, down from the previous session's close at 5.14 percent.-Reuters