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Canadian bonds finish weaker, play catch-up with US

TORONTO: Canadian government bonds finished their first trading session of the new year weaker on Tuesday in a belated reaction to a tumble in US Treasuries on Monday when Canadian markets were shut for a holiday.

US bonds, meanwhile, got a temporary shot in the arm from severe weakness in the world's equity markets. But analysts said the uptrend is unlikely to withstand the pressure of interest rate jitters for long.

"The big story that's gone on today is the weakness in the equity markets," said Mark Chandler, senior economist at Goldman Sachs Canada.

"The weakness in the equity markets has helped the bond markets and our bond market is lagging behind the US because we were closed yesterday when the US had to struggle with the idea of higher rates," he said.

While Canadian markets were shut on Monday for a holiday in lieu of New Year's Day, US Treasuries were buffeted by fears that now the rollover to year 2000 has passed without serious complications, the Federal Reserve will look to raise interest rates at its February meeting.

The Fed held off on rate moves in December, citing the need for a smooth transition to Y2K.

US bond prices were also helped on Tuesday by news that the Federal Reserve will keep its respected leader for another four years.

Any lingering uncertainty that Alan Greenspan would remain at the helm of the world's most powerful central bank evaporated when President Bill Clinton announced that he was renominating the 73-year-old Fed chairman for a fourth term.

Greenspan, chairman since 1987, has garnered huge respect in the financial markets for guiding the US economy through some rough waters with a steady hand on the tiller.

"It's a challenge that's like eating peanuts: you keep doing it, keep doing it, and you never get tired," he said after Clinton announced his renomination.

Canada's benchmark 30-year bond due June 1, 2027, finished C$1.65 weaker at C$120.33 to yield 6.414 percent. In contrast, the US long bond rose a full point to yield 6.540 percent.

Friday's release of the US employment report will be closely scrutinised by a market hungry for clues as to the extent of rate increases necessary for the Fed to cool off the US economy.

US nonfarm payrolls are forecast on average at 224,000 in December, down from 234,000 in November. The jobless rate is expected to stay at 4.1 percent. Closely watched hourly earnings are seen rising 0.3 percent after a tame 0.1-percent gain.

The two-year bond due December 1, 2001, fell 24 Canadian cents to C$98.58, yielding 6.048 percent.

In the money market, Canada's three-month when-issued treasury bills yielded 5.00 percent after 4.98 at the previous close.-Reuters