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Canada bonds tumble after weak auction adds pressure

TORONTO: Canadian government bonds tumbled lower across the curve on Wednesday after a poorly received auction of C$2.6 billion of 10-year government bonds help cement the negative tone in the market.

"It's been a phenomenal day in terms of volatility," said Brigid Barnett, an analyst at T.D. Securities Inc.

The disappointing bond auction and stronger-than-expected consumer price data for February combined to ensure Canadian bonds lagged behind US Treasuries across the curve on Wednesday, analysts said.

"We had our bond auction, which was historically one of the worst we've seen, and that wreaked havoc with Canadian markets," Barnett said.

The Canadian benchmark long bond, due 2027, lost 85 Canadian cents to C$128.89 to yield 5.860 percent.

In the US, the 30-year T-bond gained 8/32 to yield 6.074 percent. The negative yield spread between the two long bonds was at 21.4, from 28.2 at the previous session's close.

The C$2.6 billion auction of 10-year Government of Canada bonds netted a bid-to-cover ratio of 1.88, the weakest in the past 28 auctions, according to Thomson Global Markets.

"The 10-year auction was a little sloppy. I guess the dealers are still sitting with some bonds, so they have to mark down the prices," said one fixed-income portfolio manager in Toronto.

The auction resulted in an average yield of 6.058 percent.

While the C$9.3 billion of government bond maturity and coupon payments scheduled on Wednesday should have supported some buying of Canadian bonds, that support failed to materialise, market watchers said.

News early in the session that Canada's all-items consumer price index rose 2.7 percent in February - higher than the expected 2.4 percent increase - and that the core index rose 1.6 percent added to the domestic pressures on Canadian bonds, market watchers said.

"That was a fundamental thing this morning which did weigh on Canadian bonds, or at least added to the negative tone," Barnett said.

US producer price index data scheduled on Thursday and consumer price index data on Friday may be inducing caution in some bond investors, market watchers said.

"I think most people probably prefer being on the sidelines to being aggressive," the portfolio manager said.

News that the province of Quebec's recently released budget for the 2000-01 fiscal year will generate a surplus of C$2.7 billion had no discernible impact on yield spreads for that province's bonds, one Canadian bond trader said.

"Guys were pretty much anticipating those types of numbers," he said.

The Canadian short end underperformed the long end slightly on Wednesday, pushing the negative yield spread between two-year and 30-year bonds to 15.3 basis points from 14.8 at the previous session's close.

Canada's two-year bond lost 9 Canadian cents to C$98.77, for a yield of 6.010 percent.

In money markets, the three-month when-issued T-bill yielded 5.25 percent, up from a yield of 5.24 percent at the previous session's close. -Reuters