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Canada bonds mixed after widely expected rate move

TORONTO: Canadian government bonds ended mixed on Wednesday as the market absorbed a widely expected 25-basis-point interest rate increase from the Bank of Canada in a calm, controlled fashion.

The middle section of the yield curve outperformed both the short and long ends on Wednesday, with long bonds succumbing to supply pressure stemming from a new C$500-million long bond deal from the province of Ontario.

Ontario issued a C$500 million, 30-year bond priced 39 basis points over a comparable Government of Canada bond early in the session.

The Canadian benchmark long bond, due 2027, lost 17 Canadian cents to C$131.54 to yield 5.703 percent.

In the US, the 30-year T-bond gained 1/32 to yield 5.973 percent. The negative yield spread between the two long bonds was at 27.0, from 28.3 at the previous session's close.

The Canadian curve tracked the US market fairly closely on Wednesday.

The Bank of Canada's rate move was so widely expected that the market showed little immediate reaction to it, with longer bonds edging higher after the bank announced the increase at its usual 9:00 a.m. (1400 GMT) window for announcing policy moves. It then surrendered its gains as the Ontario deal was priced, languishing at lower levels for the balance of the session.

Analysts said the weakness in the long end was largely due to Ontario's 30-year issue, which was priced to yield 39 basis points over the Government of Canada curve.

"That's the only part of the curve that is departing materially from the US, and I think that is supply-related," said Marcel Kasumovich, associate economist at Goldman Sachs Canada.

The language used by Bank of Canada officials in the news release explaining their rate move was considerably more hawkish than many analysts expected, encouraging some to conclude that the bank will continue to match interest rate increases from the US Federal Reserve in the coming months.

Although the release announcing the bank's February 3 rate increase referred to "approaching full capacity in a prudent way," the release on Wednesday stated that "the strengthening pace of economic expansion has been rapidly absorbing capacity and runs the risk of putting excessive pressure on capacity limits."

"Here, they suggest quite clearly that the current pace isn't all that prudent," Kasumovich said.

The Bank of Canada may even raise rates independently of the Fed in coming months if it is sufficiently worried about domestic inflationary pressures, he added.

But even with central banks around the world warning about the risks of inflation, North American bond markets continued to enjoy an essentially positive tone on Wednesday, he said.

"The resilience at the long end is pretty staggering, really. We have a situation where growth is clearly on an above trend pace, central banks are warning of the upside risks to inflation, commodity prices remain firm, short rates are rising and the long end is just absolutely resilient," Kasumovich said.

Although the short end of the Canadian bond market slipped lower as the session progressed, the Bankers Acceptance futures market in Canada was little affected by the rate move, he said, with the yield on the June BAX contract remaining around 5.70 percent on Wednesday afternoon.

"(That) doesn't incorporate a whole lot of risk of future tightening. Neither does the December contract for that matter. I'm a little bit surprised that the front end of the market hasn't taken this a little harder," Kasumovich said.

The Canadian bond market may be in for a period of range trading in coming sessions, he said.

"There's not a whole lot of information over the course of the next week, but there will be a few things that will be pretty important," he said.

Canadian retail sales data on Thursday and January gross domestic product growth data next Friday could affect the market in coming sessions, he said.

In addition to the Ontario long bond, Scotiabank priced "BaTS" trust securities at a spread of 140 basis points over a comparable Government of Canada bond. Scotia Markets was the lead manager on the deal, according to Thomson Global Markets. Genesis Trust issued a securitization deal in two tranches, a five-year issue totalling C$300 million and priced at 44 basis points over the Government of Canada curve, and a C$350 million three-year issue at a spread of 38 basis points.

Canada's two-year bond lost 5 Canadian cents to C$99.64, for a yield of 5.923 percent.

In money markets, the three-month when-issued T-bill yielded 5.23, unchanged from 5.23 percent at the previous session's close.-Reuters