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Canada bonds end up as market waits for Fed

TORONTO: Canadian government bonds ended higher across the curve on Tuesday, with the Canadian dollar's robust recovery from early lows cited as a positive for Canadian fixed-income assets.

The Canadian benchmark long bond, due 2027, gained 58 Canadian cents to C$122.47 to yield 6.270 percent.

The US 30-year T-bond gained 25/32 to yield 6.426 percent. The negative spread between the two long bonds was at 15.6 basis points, from 18.0 at Monday's close.

Bill Girard, vice-president at Scotia Cassels Investment Counsel, said the Canadian currency's rebound from overnight lows was supportive for the Canadian curve, which began the session modestly higher and climbed higher later in the session.

"(The Canadian dollar) went through some pretty important levels there, in the wee hours, and rallied back nicely," he said.

North American bonds showed surprising resilience in the face of the prices paid component of the US National Association of Purchasing Management's manufacturing index for January, which rose to 72.6, its highest level since April 1995. The overall index was at 56.3.

"The prices paid was a bit of a shocker," Girard said.

Bond market players are hunkering down for the results of the US Federal Reserve's policy-setting open market committee meeting, which started on Tuesday and concludes on Wednesday.

"I guess everyone pretty much sits and waits to see what happens tomorrow," Girard said, adding that it is "possible but not probable" that the US central bank will increase interest rates by 50 basis points.

"I think that's pretty much the market expectation. I think it's certainly supporting the inversion at the long end, apart from everything else," he said.

The Canadian yield curve remained fairly stable on Tuesday, with the long end outperforming the short end slightly.

Canada's two-year gained 7 Canadian cents to C$98.32, for a yield of 6.233 percent.

The three-month when-issued was at a yield of 5.27 percent, up from Monday's close at 5.22 percent.

Corporate spreads have tightened somewhat in recent sessions, Girard said. "I know in corporate land people were getting a little bit antsy the last couple of days, with spreads widening on Friday and a bit more yesterday," he said.

But spreads in Canada have only widened by a few basis points, and are unlikely to match the recent marked widening in the US, he added.

"A couple of selected names are getting pushed around a little bit more than the others," he said.

Interest in buying corporate bonds doesn't seem to have diminished significantly, he said. "I certainly get more dealers calling me asking to buy bonds than trying to sell me bonds at this point," Girard said. "I think the underpinnings for credit spreads are still pretty good."

In supply news, General Motors Acceptance Corporation issued a C$100 million, 7 percent bond at spread of 49 basis points above the Government of Canada curve in the euro market, according to Standard & Poor's MMS.-Reuters