20000219Canada bonds close mixed after Greenspan remarks

TORONTO: Canadian government bonds ended mixed on Thursday, with the long end surging and the short end crumbling after a hawkish report from US Federal Reserve Chairman Alan Greenspan during his semi-annual Humphrey-Hawkins congressional testimony.

Both the Canadian and US yield curves continued to invert on Thursday, with yields at the long end plunging sharply lower while yields at the short end climbed.

The Canadian benchmark long bond, due 2027, gained 82 Canadian cents at C$126.63 to yield 6.003 percent.

The US 30-year T-bond gained 18/32 to yield 6.224 percent. The negative spread between the two long bonds was at 22.1 basis points, from 21.1 at the previous session's close.

The Canadian market tracked US Treasuries fairly closely on Thursday, with the Canadian 30-year and 10-year bonds the only issues to notably outperform their US equivalents.

"I think the day's events were certainly further supportive of an inversion of the curve," said Robert Marcus, senior portfolio manager at Altamira Management Ltd.

The main thrust of Greenspan's remarks were hawkish, Marcus said. There was an implicit call for higher short-term interest rates as long as the economy continues to grow at a pace that may induce inflationary pressures, he said.

"The (Federal Open Market Committee) will have to stay alert for signs that real interest rates have not yet risen enough to bring the growth of demand into line with that of potential supply, even should the acceleration of productivity continue," Greenspan testified.

"But on the other hand, he made some, I thought, positive comments on the long end of the bond market," Marcus added.

Greenspan told US legislators that lower yields at the long end of the yield curve hadn't been overly stimulative to the US economy, since yields for long-term corporate and mortgage-related issues had not moved substantially lower, he said.

"You could see the bid come into the long end of the market right after those comments," Marcus said.

Softer-than-expected US producer price index data on Thursday helped offset the negative effect of Greenspan's testimony, market watchers added.

Producer prices were unchanged in January, defying expectations of a 0.2 percent increase.

"I wouldn't say the environment is necessarily bullish for bonds, I would say that it's supportive for long-term rates, and it's supportive for the continued inversion trade," Marcus said.

"The comments this morning were not a surprise. The curve is to invert, the short rates are going to go higher, and the curve will become inverted from the short end all the way out," said one Toronto bond salesman.

"The thing that surprises most is the absolute strength of the long end -- it's got a mind of its own," he added.

While strength in the long end in part reflects anticipated scarcity in that particular asset, it could also reflect confidence that the Fed will be able to manage an effective economic slowdown in the US, he said.

"The other theory, of course, is that if the Fed is going to tighten -- and tighten aggressively -- down the road, then you are going to see a slowdown eventually and people are going to want to buy long bonds," the bond salesman said.

Greenspan's testimony on Thursday has prompted some discussion that the US central bank may increase short-term rates by 50 basis points at its next policy-setting meeting on March 21 rather than the previously expected 25, he added. "There's a decided move to assuming that the Fed's next move may be 50 basis points," he said.

The yield on two-year US Treasuries could reach 7 percent, while long bonds could drop to 6 percent, he said.

On the new issue front, a securitization deal, the Hollis Receivable Term Trust, is wending its way towards the market, a market source said.

The issue is expected to range between C$500 million and C$1 billion in size, the source said.

Canada's two-year bond was down 11 Canadian cents at C$98.35, for a yield of 6.240 percent.

The weakness in the short end in the wake of Greenspan's remarks also surfaced in the money market. The three-month when-issued T-bill was at a yield of 5.19 percent, up significantly from the previous day's close at 5.13 percent.-Reuters