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Canada bonds end lower on strong economic data

TORONTO: Canadian government bonds ended lower on Monday as stronger economic data in Canada and the United States intensified fears that both the US Federal Reserve and the Bank of Canada are heading for rate increases later this week.

"When you stand back and look what the economic data have been in the last couple of days, it's been unquestionable economic strength on both sides of the boarder, and I would say decidedly bearish results for both bond markets," said Doug Porter, senior economist at Nesbitt Burns Inc.

"Now that equities have found their footing again, I think it's appropriate that bonds are weakening on both sides," he added.

The Canadian benchmark long bond, due 2027, lost 24 Canadian cents to C$121.63 to yield 6.326 percent.

The US 30-year T-bond gained 12/32 to yield 6.493 percent.

Statistics Canada reported on Monday morning that Canadian GDP grew by 0.6 percent in November -- higher than the expected 0.4 percent increase.

In the US, personal spending rose 0.8 percent as forecast, while personal income climbed 0.3 percent.

Monday's domestic GDP report seems to eliminate any possibility that the Bank of Canada would be reluctant to match a 25-basis-point interest-rate increase from the US Federal Reserve after its policy-setting open market committee meeting later this week, Porter said.

"It was strong from top to bottom. It showed that whatever lull we saw in the economy over the fall was just a brief pullback," he added. "Certainly, there's plenty of economic justification for the bank to follow the Fed, and I guess that's what they'll do," he said.

While most analysts agree that the Canadian central bank will match the Fed if it raises rates by 25 basis points, many doubt that it would match a larger increase.

Some of the market action on Monday was attributed to consolidation after erratic trading on Friday, Porter added. "Of course, we had quite a wild market on Friday, and I think there was a bit of settling out after that," he said.

Canadian bonds lagged behind their US counterparts through most of the curve on Monday, reflecting in part a vacillating performance by the Canadian dollar, analysts said.

The Canadian curve flattened notably on Monday as the long end continued its pattern of outperforming shorter maturities.

Canada's two-year dipped 10 Canadian cents to C$98.24, for a yield of 6.279 percent.

The three-month when-issued was at a yield of 5.22 percent, up from Friday's close at 5.21 percent.

In addition to the US Federal Reserve's policy-setting open market committee meeting, there are a number of important data releases for bond markets this week, including the release of US nonfarm payrolls data on Friday.

Trading in Canadian bond and money markets was said to be moderate by the end of the session, with participants moving toward the sidelines in advance of the Fed meeting later in the week.-Reuters