Canadian bonds ended higher

Canadian bonds ended higher Tuesday, outperforming U.S.
Treasurys in some maturities and avoiding the volatility that plagued that market during the session.

A persistent bid remains in the Canadian market despite the absence of any key domestic data or other significant market drivers Tuesday.
1.25s 2011 100.08 up 0.08 1.22% vs 1.27%
3.00s 2014 102.41 up 0.09 2.49% vs 2.53%
3.75s 2019 102.74 up 0.28 3.43% vs 3.46%
5.00s 2037 116.44 up 0.46 4.02% vs 4.03%
10-Yr Spread to U.S. 10-Yr: -22 vs -26

One Toronto bond trader said there was a strong appetite for 10- and 30-year bonds from domestic accounts Monday, and the bid tone in the market seems likely to persist.

“We’ve definitely seen swap-related buying,” he added. “We’ve seen buying in the overnight session of very good size in the 10-year sector.”

The bond market appears to be benefited from general global interest in Canadian assets, he said.

“Canada seems to be in the spotlight with commodities and the Canadian dollar and with the stock market (rallying),” the trader said. “I think it’s a ‘plow money into Canada’ kind of scenario,” he said.

Recent fluctuations remain within broad earlier trading ranges, some market watchers said.

“To be honest, we seem to be rangebound,” said James Price, senior
vice-president and director of fixed-income at Blackmont Capital.

“We still seem to be stuck in that whole bull/bear push/pull,” he said,
acknowledging that trading has been a little more volatile in recent sessions.

Analysts in the U.S. said bonds in that market sold off after news that the National Association of Realtors’ index for pending sales of previously owned homes rose for the third month in a row in April, this time by 6.7%, easily beating economists’ expectations for a 0.5% increase.

There are no significant Canadian data releases Wednesday.
Price said he expects the Bank of Canada to keep its overnight target rate at 0.25% at its scheduled policy announcement on Thursday, as it made a conditional commitment to keep the rate at that level until the end of the second half of 2010 at its last policy statement in April.

Price expects the bank’s policy statement to reflect continued concern about the economy.

“I would expect to see a little bit of language that deflation is a bigger
concern than inflation,” he said.

The bank’s statement could have a brief positive impact on the market, he added. “We might get a little bit of a bid out of it, but I would suspect it would be short lived and we’ll be back to watching the Treasury and the Fed,” he said.

In supply news, the Bank of Canada said it will conduct a repurchase
operation June 9 on behalf of the Government of Canada, for the repurchase of up to C$500 million (US$458 million) of Government of Canada marketable bonds.