Tuesday, 12 June 2012

Canadian Bonds Retreat as Equity Markets Rally on Positive Sentiment

Canadian bonds pulled back Tuesday, moving broadly lower as North American equity markets rallied during a relatively muted trading session.
Yields for Canada's two-year bond were at 1.024% late Tuesday, from 1.006% late Monday. The 10-year bond was yielding 1.811%, from 1.762%, according to electronic bond trading platform CanDeal.
Yields for the 30-year bond were at 2.382% Tuesday, from 2.338% late Monday.
Bond yields move inversely to bond prices.
After paring losses during the morning session, Canadian bonds retreated, with the longer end of the curve outperforming the rest of the maturity stack, following the sale of three-year U.S. Treasury notes Tuesday afternoon that saw mixed results.
The longer end subsequently receded against the other maturities, resulting in a steeper yield curve than on Monday.
With little economic data scheduled for release this week, investors took cues from external headlines. North American equity markets were supported by comments made by Federal Reserve Bank of Chicago President Charles Evans who called for additional monetary stimulus to be injected into the U.S. economy and led to a sell-off in fixed-income assets.
Europe continued to weigh on market activity as the European Central Bank reiterated that the euro zone needs to create a banking union to help stabilize the region's shaky fiscal outlook.
Canadian 10-year bonds, being highly correlated to U.S. Treasurys, could see yields edge further to 1.7% if confidence in the global economy continues to weaken and their U.S. counterparts move to a yield of 1.5% from 1.663% recently, said Peter Gibson, chief strategist for CIBC World Markets in Toronto.
"You'd have thought that given our better fiscal position that Canadian bond yields would be lower, but you've got a larger, more liquid market and the reserve status of the U.S. so people would tend to go there first," Mr. Gibson said.