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Canadian bonds end down as US holiday becalms market

TORONTO: Canadian government bonds ended mixed but down slightly through most of the curve on Monday after a market holiday in the U.S. bought Canadian bond trading to a virtual standstill, market watchers said.

"There's nothing happening. The Canadian market is down a little bit," said one Canadian bond trader.

U.S. markets were closed for Martin Luther King Jr. Day.

Canada's benchmark 30-year bond due June 1, 2027, gained 2 Canadian cents to C$119.80 to yield 6.449 percent.

The U.S. long bond lost 3/32 to yield 6.698 percent. The negative spread between the two totalled 24.9 basis points after trading at 23.7 basis points at the previous close.

While yields against the U.S. pushed slightly further into negative territory at the long end on Monday, underperformance of U.S. bonds through the rest of the curve resulted in some narrowing of negative spreads in other maturities.

The underperformance resulted from some reappraisal of the recent push to wider negative spreads against the U.S., the trader said. "Guys are just readjusting Canada/U.S. to more sensible levels here, but otherwise there's been actually been no action whatsoever," he said.

"Tomorrow morning, the hostilities will resume," the trader said. "Today's a nothing day, tomorrow things will be back to normal."

The bond trader said he believes the market is poised to reverse direction after a long bearish streak, but believes it could slip even lower before bouncing back.

"Even though I think we're very close to a turn in the bond market, you could still have a couple more shakeouts," he said, adding that the yield on the benchmark U.S. Treasury bond could still reach 7.00 percent before the market reverses direction.

The market's failure to rally significantly on friendly U.S. inflation numbers on Friday suggested some lingering negativity, he added.

"Unless or until the Street gets shorter and clients get shorter, the market might drift, but for a good move up, you need people that are short," he said.

Still, the change to a more positive direction may happen relatively soon, he added.

"I think we're much, much closer to a bottom than not," he said.

The two-year bond due December 1, 2001, was down 2 Canadian cents to C$98.44 with the yield at 6.140 percent.

Canada's three-month when-issued treasury bills yielded 5.08 percent, up from Friday's 5.07 percent close.-Reuters