Canadian bonds unchanged despite euro, U.S. news; technical bid remains; Yellow Media softer

By Rebecca Melvin

New York, Nov. 22 - Canadian bond markets were called unchanged on Tuesday as investors chose to sit tight, not selling and not adding to positions, as liquidity began to shut down ahead of the American Thanksgiving holiday.

There were no new issues. Although there is healthy demand for new paper, it's possible that there won't be any new corporate issuance for the balance of the year, sources said.

"The demand is there, if it's priced correctly and for the higher quality issuer," a Toronto-based sellsider said.

Although the market was generally stable, there was a little bit of movement in individual names. Yellow Media Inc.'s short-dated notes were a little softer, for example, a high-yield trader said.

Meanwhile, Bank of Canada priced a relatively small C$13.5 billion of Government of Canada treasury bonds in three tranches at an auction on Tuesday. Settlement will occur on Thursday.

The Bank of Canada deal was considered insignificant.

There's a technical bid to the market because inflows have exceeded supply, by and large, but there is very little being offered or the offer is not very deep, a trader said.

Given the technical bid and not a lot of issuance, there may be certain names that gap up, especially given that earnings season was positive.

Euro zone fatigue

On Tuesday, the market was static. While the market continues to eye the debt crisis in the euro zone, it wasn't reacting to headlines.

One source said the reason is that the news on the whole represented just more of the same.

"The markets are getting fatigued with the European debt market news," a fixed income strategist said, adding that there was not a lot of "new" news and the market wasn't reacting to headlines that were simply more of the same, like that Spain's bond yields were going up.

"Yields go up every single day. What's changed?" the strategist said.

Among Tuesday's headlines were the International Monetary Fund's new liquidity tools that are aimed at enabling the fund to respond better to diverse liquidity needs, including those affected during periods of heightened economic or market stress.

In that regard, the IMF was implementing pre-application procedures and looking at lowering or waiving some of the standards to qualify for loans.

Spain saw a sharp rise in the yields it was required to pay to sell €3 billion ($4.05 billion) of three- and six-month bills, reflecting a sharp rise in yields for Spain and other non-German euro-zone borrowers in recent weeks.

That came after Standard & Poor's confirmed Spain's AA- credit rating following Sunday's general election, which saw the opposition center-right Popular Party win an absolute majority. Fitch Ratings said the incoming government must move quickly to detail planned reforms.

These IMF initiatives weren't seen as having an impact on the Canadian bond market, even though players were watching the developments closely.

Market stays put

The only thing that is going to make the bond market move is a "game changer," like more involvement of the European Central Bank, a market source said.

"These things helped risk markets, but it doesn't do anything for the bond market," a source said.

Equities pared losses or moved higher in the face of these headlines and because it looks like another round of quantitative easing is on the table in the United States following the release of the minutes from the last Federal Open Market Committee meeting.

Even domestic news like stronger-than-expected Canadian retail sales weren't seen as impacting the bond market.

"Bonds aren't going to be reactive to the second-tier numbers. They are month-over-month figures and very volatile. The only thing it solidifies is that retail sales will be OK," a market source said.

Given the shortened trading week, with U.S. markets closed Thursday for Thanksgiving, and extremely thin liquidity, it was unlikely that there would be significant trading action in bonds, he said.

"Why would anyone want to put on a position today that they can't get out of due to low liquidity tomorrow?" the market source said.

Yellow Media softer

Yellow Media's bonds were softer. Its 6.5% notes due 2013 (DBRS: BB) were down in the mid to high 40s, a bond source said on Tuesday.

The Montreal-based phone directory publisher has traded distressed since it violated a bank facility covenant.

It has sold assets and "had a bunch of issues after that," a bond source said.

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