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Canada bonds end mostly higher as tech stocks dive

TORONTO: Canadian government bonds ended mixed but mostly higher on Monday as safe-haven flows from declining technology stocks injected some life into otherwise anaemic trading, market watchers said.

The Canadian benchmark long bond, due 2027, was unchanged at C$130.84 to yield 5.740 percent.

In the US, the 30-year T-bond gained 8/32 to yield 5.814 percent. The negative yield spread between the two long bonds was at 7.4 basis points, narrowing from 8.8 at the previous session's close.

Canadian bonds languished with small gains through much of the session, achieving most of their advances as the close of trading approached. The Canadian market lagged US Treasuries through the entire yield curve on Monday.

"I suppose we could point to stocks as a somewhat positive factor for the market, but I think overall people are still waiting to see the US payrolls report later in the week," said Rob Palombi, senior fixed-income economist with Standard & Poor's MMS.

Trading was quiet through most of the session on Monday, with the bond information system CanPX reporting a total of C$523 million in eight benchmark bonds by the close.

The transition from the first to second quarter may have inhibited trading, said Sheldon Dong, fixed-income strategist at Merrill Lynch Canada.

"I think it's the start of the new quarter. People's books were pretty much closed last Friday," he said. "There really wasn't much to trade off."

"There doesn't seem to be a lot of flow," Dong added. "For the most part, there's been very little activity."

The pummeling received by high-tech stocks encouraged a "flight-to-quality" bid to US Treasuries, market watchers there said.

But a resurgence in "old economy" stocks on Monday siphoned off some of the safe-haven flows that would otherwise have instigated a bigger rally in bond markets, Dong said.

"All the safe-haven money went into the old economy stocks," he said. "If the stocks would have come off today, bonds might have done better."

The shadow of looming new issue activity may also have helped keep the Canadian bond market subdued, some analysts said.

Shaw Communications is currently working toward a US$400 million issue of senior notes and a C$250 million issue of five-year senior notes. Market sources said the term on the US-dollar issue will likely be 10 years and the spread around 235 basis points, according to Standard & Poor's MMS.

In other supply news, Talisman Energy has filed a preliminary short form prospectus for C$500 million of debentures. The debentures may be offered in one or more issues totalling C$500 million, the prospectus said.

On the economic data front, a report by the National Association of Purchasing Management (NAPM) showed the US economy remained on a steady growth track in March and pointed to gathering price pressures.

The NAPM March index of manufacturing activity slipped to 55.8 from 56.9, but the sector still grew for the 14th straight month. A reading above 50 indicates expansion.

A sharp rise in the gauge showing prices paid by manufacturers for their goods, to 79.8 from 74.1 in February, kept a lid on longer-term Treasury prices despite the weakness in technology shares, traders said.

"The market didn't even budge off that, surprisingly," Dong said.

Market players may have attributed the increase in the prices-paid component to oil price increases, he added.

"I assume that people shrugged it off because they figured most of it was oil, and that will get reversed sometime down the road. But from our perspective, it looked to us like the price increase was fairly broadly based, so it was a bit more than oil," he said.

The next major data for North American bond markets is the release of the US nonfarm payrolls report for March and Canadian employment data for the same month, market watchers said.

The short end outperformed the long end, pushing the negative yield spread between the two-year and 30-year bonds to 17.6 from 19.0 at the previous session's close.

Canada's two-year bond gained 2 Canadian cents to C$99.64, for a yield of 5.926 percent.

In money markets, the three-month when-issued T-bill yielded 5.36 percent, up from the previous session's close of 5.35 percent.-Reuters