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Canada bonds down, but continue to outpace US

TORONTO: Canadian government bonds ended down moderately on Wednesday, but once again outperformed the US as that market grappled with new supply.

Trading flows in Canadian bonds remained moderate as market players stayed largely sidelined in advance of critical US data later in the week and a speech on Thursday from US Federal Reserve Chairman Alan Greenspan.

"I guess we are modestly outperforming. In the US we're getting some supply and that's keeping the US under pressure," said Mario Angastiniotis, senior economist at Standard & Poor's MMS.

Canada's benchmark 30-year bond due June 1, 2027, lost 17 Canadian cents to C$119.31 to yield 6.482 percent.

The US long bond lost 15/32 to yield 6.711 percent. The negative spread between the two totalled 22.9 basis points after trading at 19.7 basis points at the previous close.

A solid showing by the Canadian dollar on Wednesday helped buttress the Canadian curve and enabled it to outperform the US Treasury market, analysts said.

"The Canadian dollar is holding in relatively firm ground, so that's helping the Canadian bonds outperform, especially at the back end," Angastiniotis said.

The Canadian yield curve continued the flattening trend that's prevailed through the week, with the spread between the 10-year and 30-year bonds actually inverting on Wednesday for the first time in 10 years, according to analysts at MMS.

The negative spread, which stood at 3.1 basis points late on Wednesday, will likely not last, Angastiniotis said.

"I don't think it's sustainable. It's mostly absence of supply at the long end that's causing it," he said. "Unless the whole curve intends to invert, we should see a rebound back into positive territory for the spread itself."

Angastiniotis described trading activity in Canadian bonds as "light to moderate" on Wednesday. "I think pretty much the market is on hold until the data tomorrow and the next day," he said.

Producer price and retail sales data for December are released in the US on Thursday, while the consumer price index will be disclosed on Friday.

In addition, US Fed Chairman Alan Greenspan is scheduled to speak on Thursday evening, an event that will also be closely scrutinised for hints about monetary policy direction in the US

The two-year bond due December 1, 2001, was down 3 Canadian cents to C$98.40 with the yield at 6.163 percent.

Canada's three-month when-issued treasury bills yielded 5.09 percent, down from 5.10 percent on Tuesday.-Reuters