Wednesday, 20 June 2012

Canada Bonds Nursing Wounds Inflicted by Fed Speculation

The Canadian bond market, along with US Treasurys is still nursing the wounds inflicted by speculation that the Fed will announce some new monetary stimulus when its policy statement is released in less than half an hour. Two-years are yielding 1.077% vs 1.042% late Tues, 10-years at 1.794% from 1.761%. If the Fed disappoints those market players who are salivating over the prospects of more liquidity, that will be like applying a soothing balm to the bond market's injuries, and perhaps put the market back on a stronger footing.

Canadian Bonds Slump in Quiet Trade Ahead of FOMC

Safe-haven Canadian bonds slumped in quiet trading Wednesday, as investors pinned their focus on the potential for a further easing move from the Federal Reserve.

The market increasingly has come to anticipate some fresh stimulus from the Fed, raising the potential that Canada's government debt market could see a sharp rally if the Federal Open Market Committee, the Fed's policy-setting body, doesn't deliver.

Canada's two-year bond yield was at 1.079% Wednesday, from 1.042% Tuesday. The 10-year bond yielded 1.805%, from 1.761%. Bond yields move inversely to bond prices.

The FOMC concludes its two-day meeting with a policy statement at 12:30 p.m. EDT (1630 GMT) and a news conference around 2:15 p.m. EDT (1815 GMT) Wednesday.

Many investors expect the Fed to extend Operation Twist, a program set to expire this month in which the Fed sells shorter-dated U.S. government debt and buys up longer-dated ones to reduce long-term interest rates. But investors are also pondering the possibility that the Fed will adopt an outright, large-scale asset-purchasing program, or quantitative easing, which would add to the Fed's balance sheet. It would be the third such program in the U.S. since the start of the global economic crisis.

The market consensus is that the Fed will announce something Wednesday. Doing nothing other than delivering more dovish talk is considered "the least likely outcome," said Derek Holt, Scotiabank economist.