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Canada bonds up sharply alongside strong US market

TORONTO: Canadian government bonds ended sharply higher on Tuesday as market players embraced a more benign outlook on inflation and monetary policy in Canada and the US in coming months, some market watchers said.

While early strength in the bond markets was attributed to weak equity markets, fixed-income markets retained their strength while stock markets in the US rebounded later in the session.

"I think it's a general conviction in the market that, one, the inflation outlook is not that bad, and, two, we're not going to see a very aggressive tightening from either the bank of Canada or the Fed," said Rob Palombi, senior fixed-income economist with Standard & Poor's MMS.

The Canadian benchmark long bond, due 2027, gained C$1.53 to C$130.27 to yield 5.780 percent.

The US 30-year T-bond gained 35/32 to yield 6.088 percent. The negative spread between the two long bonds was at 30.8 basis points, from 28.8 at the previous session's close.

Much of the positive impetus in the Canadian market was derived from the strength of the US market, analysts said.

Market-friendly comments from New York Federal Reserve President William McDonough were positive for North American bonds on Tuesday, analysts said.

McDonough said he expected any impact on US monetary policy from the so-called "wealth effect" to be minor. He also said he thought inflation in the United States was low and likely would remain so.

Asian buying at the long end and gains in European government debt were also cited as supportive factors in the US market.

The Canadian market underperformed the US through the entire yield curve early in the session, but gained ground against Treasuries as the day progressed.

Flows in Canadian bonds were said to be moderate. "There's been scattered talk of interest to buy the middle of the curve," Palombi said.

Canada's two-year bond was up 14 Canadian cents at C$98.65, for a yield of 6.061 percent.

The June BA futures contract is now pricing in one 25-basis point increase from now to end of June, while in US markets, the Fed funds futures contracts are pricing into two 25-basis-point increase before the end of that month, Palombi said.

The three-month when-issued T-bill was at a yield of 5.14 percent, unchanged from the previous day's close.

In supply news, Hollis Receivables Trust priced a total of C$1.24 billion of asset-backed securities in four tranches, according to Thomson Global Markets. -Reuters