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Canadian bonds down as equity markets grab limelight

TORONTO: Canadian government bonds ended down but outperformed the US market on Monday as investors pulled away from fixed-income assets in favour of robust equity markets.

North American equity markets ended significantly higher on Monday after riding a wave of positive sentiment unleashed by news that America Online will buy Time Warner in a $190 billion stock deal.

The Canadian market resisted the full extent of the decline that beset US Treasuries after stock markets grabbed the financial limelight.

Canada's benchmark 30-year bond due June 1, 2027, lost 27 cents on Monday to yield 6.440 percent.

The US long bond lost 20/32 to yield 6.590 percent. The negative spread between the two totalled 15.0 basis points.

The Toronto Stock Exchange 300 Composite Index closed up 173.08 points to 8,602.50 on Monday, a record closing high, while the Dow Jones Industrial Average gained 54 points to close at a record 11,576.

Rob Palombi, fixed-income analyst at Standard & Poor's MMS, said the Canadian market is poised to continue outpacing the US market.

"I think the market should retain a slight bias to outperform over the near term," Palombi said.

North American bond markets shifted to a slightly more positive stance on Friday when the US nonfarm payrolls report failed to match the market players' worst expectations, alleviating concerns the US Federal Reserve will increase interest rates more than 25 basis points at its next policy-setting meeting in February, he added.

"Against that backdrop, and along with the Canadian dollar continuing on an appreciating trend, that provides a bit of leeway to outperform the US," Palombi said.

Trading in Canadian bonds remained fairly illiquid on Monday, he added. "We're not really seeing really heavy flows, and that reflects some tentativeness to the market. No one's really sure the downdraft in bonds is over," he said.

Although a heavy new issue calendar was said by some analysts to be a burden for the US Treasuries market, analysts said only limited new supply is seen on the Canadian debt market horizon. Market sources said a large securitization deal is expected from a Canadian financial institution later in the week.

The shape of the Canadian curve remained fairly stable on Monday, with the spread between the yields on the 30 and two-year bonds flattening to 34 basis points from 34.5 late last week.

The two-year bond due December 1, 2001, lost 4 Canadian cents to C$98.54 with the yield rising to 6.340 percent.

Canada's three-month when-issued treasury bills yielded 5.09 percent, up from 5.07 percent late Friday.-Reuters