20000226Canada bonds up sharply on lower stocks, soft CPI

TORONTO: Canadian government bonds ended sharply higher and dramatically outperformed the US market on Thursday as softer-than-expected consumer price data helped add luster to a market bolstered by investors seeking haven from troubled stock markets.

The strong performance was most marked in the short end, with the long end held back by new supply and weakness in the US long bond.

The Canadian benchmark long bond, due 2027, gained 27 Canadian cents to C$129.64 to yield 5.817 percent.

The US 30-year T-bond lost 4/32 to yield 6.135 percent. The negative spread between the two long bonds was at 31.8 basis points, from 29.3 at the previous session's close.

Statistics Canada reported on Thursday that all-items inflation rose by 2.3 percent on a year-over-year basis -- considerably lower than the expected 2.8 percent increase.

All-items inflation fell by 0.1 percent on a monthly basis, and core inflation, which excludes the volatile food and energy sectors, fell 0.3 percent from the previous month and rose 1.4 percent on a year-over-year basis.

"That was a stunning number," said Hank Cunningham, managing director of fixed-income at Correspondent Network.

The surprising inflation numbers call into question the Bank of Canada's projection that core inflation will reach 2 percent on a year-over-year basis in the first quarter of this year, he added.

One Toronto bond salesman said turbulent US equity markets, which saw the Dow Jones Industrial Average breaking below 10,000 before enjoying a partial rebound, were a major factor behind gains in North American bond markets on Thursday.

How much higher the bond market can go in the current environment is open to question, the bond salesman said.

"I question the validity of how much is left in the bond market -- especially at the long end. We've already priced in a lot of bad news for the stock market, so I'm not sure how much further they can take the bond market higher," he said.

The short end of the market derived the most benefit from the soft CPI figures, he added.

The Canadian long end underperformed the rest of the yield curve, losing ground after the Province of Ontario issued a C$500 million long bond mid-way through the morning.

The Ontario deal, which had a coupon rate of 6.20 per cent, was priced at C$99.468 to yield 40 basis points over a comparable Government of Canada issue.

The bond was not well-received at first, but eventually managed to elicit some buying interest.

"Out of the shoot, it did not really sell all that well," the bond salesman said.

Also in supply news, the government of Canada announced that it will be auctioning C$350 million of inflation-linked real return bonds on March 1.

Trading in Canadian bonds was fairly vigorous on Thursday morning, market watchers said.

Outperformance at the short end reduced the negative yield spread between two-year and 30-year bonds substantially on Wednesday, reducing it to 7.1 basis points from Wednesday's close at 25.3

Canada's two-year bond was up 33 Canadian cents at C$98.94, for a yield of 5.888 percent.

The three-month when-issued T-bill was at a yield of 5.10 percent, down from the previous day's close at 5.14.-Reuters