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Canada bonds drift lower in subdued trading

TORONTO: Canadian government bonds drifted lower in early trading on Tuesday, continuing Monday's quiet, consolidative trading, some market watchers said.

"Yesterday was very quiet, and it's starting off the same today," said one Canadian bond salesman.

The Canadian benchmark long bond, due 2027, was down 31 Canadian cents at C$129.23 to yield 5.842 percent.

The US 30-year T-bond lost 13/32 to yield 6.173 percent. The negative spread between the two long bonds was at 33.1 basis points, from 32.2 at the previous session's close.

Both the US and Canadian curves edged lower on Tuesday, with Canadian bonds outperforming their US equivalents throughout the curve.

"Markets were probably a little toppy, a little overbought last week, and we're working off those excesses right now," the bond salesman said. "The market's kind of drifting a little lower here with every passing day."

Trading volumes were light, with limited participation by buyside players, market watchers said. "Client-wise, it's pretty quiet," the salesman said.

"Right now, in the short-term, the market's probably still not at levels where people are ready to step in," he said.

News that Canada's capacity utilization rate rose to 86.8 percent in the fourth quarter, surpassing expectations of a 86.3 percent rate, further confirmed that the Canadian economy is robust, and did not put much additional pressure on Canadian bonds, he said.

"I don't think there was anything mind-boggling about those numbers," the salesman said.

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" and the release of employment data for February on Thursday, are expected to provide some new impetus to the Canadian bond market, analysts said.

The long end outperformed shorter maturities on Tuesday, with the negative yield spread between two-year and 30-year bonds pushing to 20.9 basis points from 17.7 at Monday's close.

Canada's two-year bond was down 7 Canadian cents at C$98.70, for a yield of 6.047 percent.

In money markets, the three-month when-issued T-bill was at a yield of 5.14 percent, up from the previous session's close at 5.13 percent.-Reuters