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Canada bonds up, but off highs as stocks recover

TORONTO: Canadian government bonds ended higher on Monday, but retreated from their early highs as recovering stock markets reclaimed some of the safe-haven flows that supported early bond market strength.

"As the stock market is coming back, people are coming out of their cubbyholes," said Mario Angastiniotis, senior economist with Standard & Poor's MMS.

The Canadian benchmark long bond, due 2027, gained 14 Canadian cents to C$129.33 to yield 5.835 percent.

In the United States, the 30-year T-bond gained 6/32 to yield 6.162 percent. The negative yield spread between the two long bonds was at 32.7 basis points, from 33.3 at the previous session's close.

North American bond markets surged early in the session after equity markets crumbled and investors scrambled for the relative safety of fixed-income assets.

The Canadian long bond was up 66 points in mid-morning trading, lagging behind its US equivalent slightly, but ceded much of those gains as stock markets recovered fairly rapidly from early losses.

"If it wasn't for the equities this morning, we probably wouldn't have seen any moves and the bias would have been defensive," Angastiniotis said.

With Canadian and US consumer price index data scheduled for later in the week, bond markets will revert to a more cautious posture, he added. "I think we can expect to resume the defensive bias tomorrow as we wait for the CPI data," Angastiniotis said.

The US Federal Reserve's policy-setting open market committee meeting on April 21 will also prompt a caution among bond market players, he added.

"Moving beyond the FOMC, though, I think that's going to open up a whole new can of worms, because essentially the market is still trying to grapple with this notion of how much the Fed is going to do," he said.

The US central bank could conceivably boost interest rates by 50 basis points rather than 25 if the upward pressure on oil prices doesn't seem to be abating, he added.

"We do risk that the market is going to begin to try to price that in," Angastiniotis said.

The Canadian short end outperformed the long end on Monday, narrowing the negative yield spread between two-year and 30-year bonds to 14.2 basis points by mid-morning from 17.6 at the previous session's close.

Canada's two-year bond gained 7 Canadian cents to C$98.82, for a yield of 5.979 percent.

In money markets, the three-month when-issued T-bill yielded 5.16, down from a yield of 5.20 percent at the previous session's close. -Reuters