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Canada bonds down on pullback from earlier gains

TORONTO: Canadian government bonds ended lower on Wednesday as profit-taking and slightly more stable North American stock markets siphoned investment flows out of fixed-income markets.

"We started off the day lower, so I think it's quite understandable," said one Canadian bond trader. "We've had a good run of late, and we were certainly due for a pullback. It's probably not done with, but I think that's pretty much all it is right now," the trader added.

The Canadian benchmark long bond, due 2027, lost 81 Canadian cents to C$129.41 to yield 5.831 percent.

The U.S. 30-year T-bond lost 17/32 to yield 6.124 percent. The negative spread between the two long bonds was at 29.3 basis points, from 30.3 at the previous session's close.

The Canadian market put in a mixed performance against U.S. Treasuries, but followed the action in the U.S. fairly closely.

While Canadian equity markets performed strongly, U.S. markets were volatile on Wednesday.

"The equity markets were down most of the day and recovered late today, which kind of took away the punch bowl for bonds," the trader said.

"I think maybe there was an overreaction to the equity market weakness earlier, and now the market's back again, so there's a reversal over some of the gains we've seen over the least couple of days," said Mark Chandler, senior economist at Goldman Sachs Canada.

The inverse relationship between bonds and equities was the primary factor driving the market on Wednesday, with a repeat of semi-annual Humphrey-Hawkins testimony by U.S. Federal Reserve Chairman Alan Greenspan having muted impact on markets, analysts said.

"There's nothing really on the fundamental front to drive things," Chandler said.

In supply news, the province of Quebec priced a C$400-million, five-year bond at 29 basis points over the government of Canada curve.

"It was kind of surprising, but it went well. They priced it on the cheap side, so it went well," the bond trader said.

In the U.S., an $12 billion auction of two-year Treasury notes was reasonably well received, Chandler said.

Outperformance at the short end reduced the negative yield spread between two-year and 30-year bonds slightly on Wednesday, taking it to 25.6 basis points from Tuesday's close at 26.9

Canada's two-year bond was down 5 Canadian cents at C$98.61, for a yield of 6.087 percent.

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