20000326Canada bonds down sharply as bulls "tired"

TORONTO: Canadian government bonds ended significantly lower across the curve on Friday as the market corrected after its recent bullish streak, market watchers said.

"I think it was just a healthy correction here. It was needed," said one Canadian bond trader. "You've got to shake the tree, let the loose apples fall, and then pick them back up and start running forward."

The Canadian benchmark long bond, due 2027, lost C$1.44 to C$130.48 to yield 5.759 percent.

In the US, the 30-year T-bond lost 40/32 to yield 5.997 percent. The negative yield spread between the two long bonds was at 23.8, from 23.0 at the previous session's close.

Some of the pull lower stemmed from the United States, where the release of minutes on Thursday from the US Federal Reserve's Open Markets Committee meeting in early February revealed that some Fed members were advocating a 50-basis-point increase at that time.

Some market watchers said the Fed minutes were in part a pretext for a market that was poised to retreat after several bullish sessions.

"Canada bonds are following the US down. Both markets were overbought. Yesterday we had an excuse to sell them when the Fed minutes were released, and it's just a continuation of that," the bond trader said.

"There could be a little bit more downside before we start moving back up," the trader said.

Jeoffrey Hall, managing analyst at Thomson Global Markets, agreed that Friday's move lower reflected a well-earned pause after market's recent bull run.

"To put it most succinctly, I think the bulls have just gone tired. We're not seeing a whole lot of selling, as far as I've been told, but you can't extend the rally much further than we have, so people are taking some adjustments on the curve," Hall said.

"We've had a pretty good run for the week, and now we're just retracing some steps," he added.

"According to London, offshore accounts are content to hold Canada where they are, they're just not content to add to Canada, whereas domestically, or between the US and Canada, you're seeing outright selling to buy Treasuries," Hall said.

The recent stronger tone in stock markets may have induced some investors to shift out of bonds, he added. "The buy side is looking at equities again, seeing if there's any value in those after a couple of days of changes," he said.

The Toronto Stock Exchange Composite 300 Index, which broke above the 10,000 level for the first time on Thursday, gained 62.57 points to close at 10,052.7 on Friday.

Trading was relatively tepid after the fast and furious pace witnessed on Thursday, market watchers said.

"We haven't really seen significant volume," Hall said. "The prices as reflected on the screens make it more damning than it is."

"Today, we didn't do a whole lot of anything. We saw a little bit of buying earlier on," the bond trader said.

The short end outperformed the long end on Friday, reducing the negative yield spread between the two-year and 30-year bonds to 24.4 from 25.1 at the previous session

Canada's two-year bond lost 9 Canadian cents to C$99.53, for a yield of 5.979 percent.

In money markets, the three-month when-issued T-bill yielded 5.30, up from 5.24 percent at the previous session's close.

In ratings news, Standard & Poor's raised Nav Canada's issuer credit and local currency senior secured debt ratings to AA plus from AA.

The ratings upgrade reflects the company's successful introduction of internationally competitive user charges since assuming responsibility for Canada's air navigation service in November 1996, S&P said in a news release.-Reuters