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Canada bonds end mixed, most lag US Treasuries

TORONTO: Canadian government bonds ended mixed on Thursday, with the long end outperforming the short end and most of the curve lagging behind the US

Much of the support for the Canadian bond market came from the US market, where Treasuries were buoyed by flight to quality flows out of agency debt early in the session, market watchers said.

The Canadian benchmark long bond, due 2027, gained 48 Canadian cents to C$132.04 to yield 5.673 percent.

In the US, the 30-year T-bond gained 22/32 to yield 5.914 percent. The negative yield spread between the two long bonds was at 24.1, from 26.6 at the previous session's close.

Canadian bonds underperformed the US except in the shorter maturities, which were outperforming Treasuries.

The US Treasuries market was enjoying an exceptionally positive tone early on Thursday, as concerns about the status of the government guarantee for agency debt roiled the markets for those issues and sent investors into the safe haven of US Treasuries.

"It's mainly (from) the US, and I think we're pretty much underperforming almost right across the curve," said Mario Angastiniotis, senior economist at Standard & Poor's MMS.

Shorter-dated maturities relinquished their gains as the session progressed and slipped into negative territory along with the US short end. Some of the gains in the Treasuries market dissipated as after hawkish minutes from the US Federal Reserve's February 2-3 policy meeting weighed on the market, market watchers there said.

"We seem to be giving up most of the gain heading in to close," Angastiniotis said. "We've had a pretty good run here over the last few weeks. People are perhaps taking some money off the table, some profit taking."

Impressive strength in North American equity markets also helped rob bond markets of some of their vitality, he added.

The Toronto Stock Exchange Composite 300 Index climbed over the 10,000 level for the first time on Thursday, only weeks after puncturing the 9,000-point level. It slipped back slightly as the session closed, ending at 9,990.1.

"We're also seeing quite a bit of gains in the stocks, and I suspect that's probably taking some of the wind out of bonds, so I wouldn't be surprised if some of those flows were out of bonds and into equities for the afternoon," Angastiniotis said.

Trading volumes were "moderate to heavy," he added.

The bond trading information service CanPx reported a total of C$1.148 billion of trading in eight benchmark bonds by late in the session on Thursday.

Other market watchers suggested disappointing Canadian January retail sales data on Thursday may have provided some measure of support to Canadian bonds. Retail sales were flat in January despite analysts' calls for a 0.4 percent increase in the month.

Statistics Canada also reported that foreigners sold a net total of C$1.25 billion Canadian bonds in January, while buying a net total of C$4.72 billion in Canadian stocks.

In supply news, the Bank of Canada posted the auction schedule for the second quarter of 2000. The schedule comprises five auctions, including one Real Return Bond Auction, with the first a 30-year auction scheduled for April 19. Details of the auction will be released on April 13.

Also on Thursday, the government released its debt management strategy for the 2000-01 fiscal year. Gross debt issuance in the coming fiscal year will match levels in the 1999-2000 fiscal year, according to a finance department news release on the debt strategy.

Canada's two-year bond lost 3 Canadian cents to C$99.62, for a yield of 5.932 percent.

In money markets, the three-month when-issued T-bill yielded 5.26, up from 5.23 percent at the previous session's close.-Reuters