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Canada bonds end up in yo-yo market

TORONTO: Canadian government bonds ended higher on Friday, but much of the market's impetus came from the United States and observers were sceptical about the longer-term direction of the vacillating Canadian market.

"The US market's been up and down and up today, and we're following," Frank Hracs, head of fixed-income research with T.D. Securities Inc.

Canada's benchmark 30-year bond due June 1, 2027, gained 33 Canadian cents to C$119.87 to yield 6.444 percent.

The US long bond was up 13/32 to yield 6.706 percent. The negative spread between the two totalled 26.2 basis points after trading at 27.4 basis points at the previous close.

Pressure from a C$2.6 billion auction of 10-year Government of Canada bonds on January 26 could hamper the market's performance early next week, Hracs added.

"I think our bigger issue is that we've got a 10-year issue next week which is probably going to hold us back over the next several days," he said.

A flurry of corporate issuance earlier this week may also dampen the demand for fixed-income assets, he added. "That's kind of taken down a lot of demand in the Canadian market," Hracs said.

With the extent of monetary tightening in the United States and Canada in coming months still unclear, an apprehensive mood continues to hang over fixed-income markets, he said.

"The market's sort of generally nervous," Hracs said. "There's lots to be nervous about."

Significant US economic data is coming next week, he said, and on Thursday, January 27, Bank of Canada Governor Gordon Thiessen will address a Halifax, Nova Scotia, audience on "Accountability and Transparency in Canada's Monetary Policy".

The US market's failure to bounce convincingly off lows at the 6.75 percent yield level for the benchmark US Treasury bond raises questions about the technical outlook for the market, Hracs said.

"Technically speaking, the market still looks very tentative here, and that's the status heading into next week," he said.

Trading in Canadian bonds was fairly active on Friday, but appeared to be concentrated largely in the shorter maturities. According to CanPx, C$813 million had been traded in the 5.25 percent Government of Canada bond maturing in December 2001, out of a total volume of C$1.24 billion in eight benchmark bonds at the end of the session.

"There seems to be some strong buyers of absolute yields in twos and fives," said one Toronto bond trader.

Interest in the short end may reflect some market players' view that yields are not going to reach the high levels predicted earlier, the trader said.

"I think the market is starting to figure out that there may have been a bit of overestimating of where we're going to," the trader said.

The long end of the curve outperformed the 10-year bond with the threat of looming supply increasing the inversion of the yield curve between the 10-year and 30-year levels, he said.

Overall, the bond trader was also sceptical of the market's strength on Friday.

"I'm not overly enamoured with the day," the trader said.

The overall shape of the Canadian curve steepened on Friday. Yield spreads against the US were pushed further into negative territory through some of the curve on Friday, but the long bond underperformed its US equivalent.

The two-year bond due December 1, 2001, was up 8 Canadian cents to C$98.38 with the yield at 6.188 percent.

Canada's three-month when-issued treasury bills yielded 5.16 percent, down from Thursday's 5.17 percent close.

Early in the day, Statistics Canada reported Canada's all-items consumer price index rose by 0.1 percent in December from the previous month -- slightly higher than the expected 0.1 percent decline -- and that core inflation fell by 0.1 percent in the same period.

All-items inflation rose by 2.6 percent on a year-over-year basis, while core inflation, which excludes the volatile food and energy sectors, rose 1.6% year-over-year, below the expected 1.7% level.-Reuters