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Canada bonds end up as markets ignore strong data

TORONTO: Canadian government bonds ended up across most of the curve on Friday as North American government bond markets continued to defy economic gravity and ignore signs of sustained economic strength.

"What we're seeing today is definitely not a reflection of fundamentals. It's still a matter of technicals driving the US market, and helping the Canadian market as well, but to a much lesser degree over the past week," said Marcel Kasumovich, associate economist at Goldman Sachs Canada.

The Canadian benchmark long bond, due 2027, gained 61 Canadian cents to C$130.73 to yield 5.750 percent.

In the US, the 30-year T-bond gained 17/32 to yield 5.839 percent. The negative yield spread between the two long bonds was at 8.9 basis points, from 9.0 at the previous session's close.

News that Canadian real gross domestic product grew by 0.5 percent in January from the previous month, considerably exceeding the 0.3 percent rise expected by analysts, had little impact on Canadian bonds, market watchers said.

In the US, the Commerce Department said spending by US consumers in February rose a stronger than expected 1.0 percent, following an upwardly revised gain of 0.6 percent in January. The National Association of Purchasing Management-Chicago said its business activity gauge rose to a seasonally adjusted 57.4 in March from 56.7 in February.

An index below 50 signals a slowing manufacturing economy, while a reading above 50 suggests expansion. The "prices paid" index rose to 74.2 from 68.9 for the prior month while the employment component rose to 51.4 from 46.2.

"The data has been nothing but strong and market-unfriendly for the most part," said Bill Girard, vice-president at Scotia Cassels Investment Counsel Ltd.

"You would think the long end would be reacting to inflation pressures, which seem to be mounting, not dissipating, but it's not," he said.

Activity in Canadian bonds was said to be fairly subdued on Friday as market players closed out the first quarter. In the US market, quarter-end "window dressing" help impart a bid to US Treasuries, market watchers there said.

Unsubstantiated market talk suggested the winding up of hedge funds operated in the United States by Tiger Management LLC may have had an impact on bond market trading on Friday, Girard said.

"There's all kinds of rumours about Tiger Fund winding up positions, and that seems to be the common argument for just about everything that's happened in the market, including the 3 percent-plus rally in the yen, which has me equally confused," he said.

Trading in corporate bonds has been fairly vigorous in Canada in the last few sessions in response to a recent upturn in corporate issuance, Girard said. "There has been a lot of corporate activity, and that's been largely driven by the new issue stuff," he said.

Yield spreads for corporate bonds are widening in Canada, but haven't yet widened to the extremes witnessed in the US market, market watchers said.

The short end underperformed the long end, pushing the negative yield spread between the two-year and 30-year bonds to 20.1 from 15.6 at the previous session's close.

Canada's two-year bond lost 3 Canadian cents to C$99.59, for a yield of 5.951 percent.

In money markets, the three-month when-issued T-bill yielded 5.35 percent, up from the previous session's close of 5.34 percent. -Reuters