Canadian Bonds End Mixed; Long End Outperforms

 
   By Don Curren 
 

        TORONTO--Canadian bonds ended mixed Friday, with the shorter-dated issues underperforming in quiet trading after outpacing longer term bonds on Thursday.
        Canada's two-year bond yield was at 0.481% Friday, up from 0.469% late Thursday, according to electronic trading platform CanDeal. The 10-year bond yield was at 1.698%, down from 1.709%. Bond yields move inversely to prices.
        The move toward a flatter yield curve is probably due to some extent to a rebalancing of Thursday's steepening, said Chaad Aul, portfolio manager at Sun Life Global Investments.
        But the market is more prone to a steeper yield curve in the coming weeks as longer-term yields will be supported by a higher move in U.S. Treasury yields in advance of the likely interest-rate increase from the U.S. Federal Reserve, he said.
        "I think a broader steepening trade is what you can expect going forward over the summer," he said.
        The yield spread between Canadian two-year and 30-year bond issues moved to 186.2 basis points Friday after expanding to 189 basis points from 182.1 late Tuesday, before the Canada Day market close on Wednesday, and 148.5 three months ago.
        While yields at the long end of the curve will likely move with U.S. Treasurys, shorter-dated issues will experience downward pressure in yields in response to expectations that the Bank of Canada may be compelled to cut interest rates again, he said.
        The U.S. Federal Reserve, on the other hand, could easily begin raising rates late this year, said Mr. Aul. "Even if the Bank of Canada doesn't do an outright cut, we'll certainly be behind the curve in terms of the U.S.," he said.
        Mr. Aul said the move might be a difficult one for the bank, as it adopted quite a positive stance about the economic outlook after cutting rates in January.
        "Another about-face from the Bank of Canada I think requires somewhat of a higher bar," he said.
        North American bond markets may benefit in the near term from safe-haven flows unleashed by investor concerns about developments in Greece, where a referendum on proposed bailout measures will be held Sunday.
        But the market is likely to shift its focus away from Greece and more completely on interest-rate differentials in the coming weeks, said Mr. Aul.
        He expects the high levels of volatility in evidence in bond markets in recent months to persist.
        "I do expect that to continue over the summer months," he said.
        Write to Don Curren at don.curren@wsj.com
        (END) Dow Jones Newswires

        July 03, 2015 16:13 ET (20:13 GMT)

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