Canadian bond trading muted ahead of interest rate policy decision; OPTI Canada bonds firm

By Cristal Cody

Prospect News, Feb. 28 - Canadian bond markets ended the month fairly quiet on Monday, sources said.

The corporate bond market is facing an "issue of price discovery and lack of liquidity," one source said. "We ended the week on a price discovery note. It's slowly coming back. It was a thin market - a lot of talk and not a lot of trade."

Coming up in March, the deal calendar remains light. At least one new high-yield offering is in the works from Canadian Satellite Radio Holdings Inc., which plans to sell 9.75% senior notes due 2018.

In the provincial bond market, the deal calendar is expected to stay light as budget season is finalized.

In secondary trading, OPTI Canada Inc.'s subordinated issues firmed, according to traders. Without any fresh news, the bonds tend to fluctuate with the market.

Government bonds on Monday fell and sent yields up on stronger data and ahead of the Bank of Canada's expected policy statement on Tuesday on the current 1% overnight rate. The Bank of Canada is widely expected to leave rates unchanged until later in the first half of the year.

The 10-year note yield rose to 3.299% from 3.28%. The two-year note yield jumped to 1.844% from 1.78%.

"Canada sharply underperformed on the back of a firmer-than-expected GDP report," said Kam Bath, a strategist with RBC Capital Markets Corp.

Statistics Canada said the real gross domestic product rose a surprise 0.8% in the fourth quarter, led by exports, following a 0.4% gain in the previous quarter. Annualized GDP growth in the quarter was 3.3%, compared to a 2.5% real GDP decline in the United States.

U.S. Treasuries traded flat on a quiet trading day Monday. Yields were little changed on the long end of the curve. The two-year note yield dropped 4 basis points to 0.68%. The 10-year note yield rose 1 bp to 3.42%.

"It's very quiet - a 3 basis point range in 10-year yields, which is remarkably light for a month-end Monday," said John Briggs, strategist at RBS Securities Inc. "We certainly had a strong run in the market over the last week."

Treasuries and Canadian bonds rallied the previous week as oil prices rose on uprisings in the Middle East.

Market reaction was light due to the round of economic data out on Monday. The Commerce Department said personal income rose higher than expected to 1% in January, up from the 0.4% increase in December. Personal spending rose 0.2% in January after a 0.5% increase in December. Market observers had expected spending to increase 0.4%.

The National Association of Realtors said its pending home sales data for January fell 2.8% after a 3.2% drop in December.

"We're waiting on Bernanke tomorrow and payrolls later in the week before deciding whether this recent rally is going to become a new trend," Briggs said.

On Tuesday, Federal Reserve chairman Ben Bernanke will testify before the Senate Banking Committee. The Labor Department will release its monthly employment report on Friday.

OPTI bonds rally

After taking a hit on Friday, OPTI Canada's 7 7/8% and 8¼% notes due 2014 "bounced back," according to a trader.

He quoted the notes at 54½ bid, 55 offered, up from opening levels around 53½ bid, 54 offered.

The senior notes, however, "haven't budged," he said.

Another trader deemed the debt up nearly a point at 543/4.

There was no news out on the Calgary, Alta.-based oil sands producer.

Stephanie Rotondo contributed to this review

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