Canadian government bonds drop; Ford bonds trading cheap; market eyes Fairfax Financial

By Cristal Cody

Prospect News, Jan. 4 - The Canadian government bond markets ended lower following the sell-off in U.S. Treasuries on the release of the minutes from the Federal Reserve's Dec. 14 meeting.

"The market was closed yesterday, so today the market reacted to some of the strong economic data from both yesterday and today," said Fergal Smith, managing market strategist at Action Economics in Toronto.

"Yields have backed up 3 to 5 basis points across the curve but are holding comfortably within the recent range," Smith said.

Canada's 10-year bond yield rose to 3.175% from 3.14%. The two-year note yield rose to 1.704% from 1.69%.

"There are no Government of Canada bond auctions this week. The major focus of the market will be the Canadian and U.S. employment data on Friday," he said. "The market is expecting solid jobs gains in the U.S. and in Canada. That should help keep a floor on yields ahead of Friday's data."

U.S. Treasuries sold off soon after the minutes of the Federal Reserve's Federal Open Market Committee meeting were released.

The Federal Reserve indicated a strong stance in sticking to its quantitative easing program to continue to buy $600 billion of Treasuries by the end of the second quarter of 2011, at a pace of about $75 billion a month.

"If the Fed stays committed to using the program, over the next six months, it will take most, if not all, the supply of Treasuries off the market," a source said.

The yield on the two-year note rose 3 basis points to 0.62%. The 10-year note yield was unchanged at 3.33%.

Yields are expected to hold until the Labor Department releases December's employment report on Friday.

High yield opens better

In Canada, the high-yield index opened up 0.25 of a point on Tuesday, an informed source said.

The market was "better bid all last week," the source said.

The bond markets were closed in Canada on Monday. No new corporate issuance was seen on Tuesday.

Ford Credit Canada Ltd.'s bonds were "trading cheap to equivalent U.S. paper by all metrics," an informed source said early Tuesday.

The market also is keeping an eye on Toronto-based Fairfax Financial Holdings Ltd.'s bonds, which are expected to be rated investment grade by Moody's Investors Service, a source said.

Fairfax Financial's 7.25% notes due 2020 were quoted at 106 bid, 108 offered, the source said.

While the Canadian markets were closed on Monday, U.S. trading activity continued in bonds from OPTI Canada Inc. and Catalyst Paper Corp., sources said.

Catalyst improves

In U.S. trading activity on Monday, Catalyst Paper was better. A trader saw the Richmond, B.C.-based company's 11% senior secured notes due 2016 at 96 bid and said that was 1 point better.

OPTI Canada

A trader saw the 7 7/8% senior secured notes due 2014 of OPTI Canada around 72 bid, calling the Calgary, Alta.-based oil sands energy operator's issue up around 1 to 1½ points late Monday.

OPTI Canada's paper moved up in line with the positive tone of the general marketplace, other traders reported.

One trader said about $30 million to $40 million of the company's assorted issues turned over, pegging both the 8¼% notes and 7 7/8% notes due 2014 at around 72.

Another trader called the 8¼% notes up half a point at 72 and the 7 7/8% notes nearly a point firmer at 713/4.

Paul Deckelman and Stephanie N. Rotondo contributed to this report

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