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Monday April 21, 2008 - 20:40:48 GMT
CEP News - www.economicnews.ca

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Closing Market Update: CGBs Outperform Ahead of Bank of Canada Decision

16:18 04/21 (CEP News) – The loonie stumbled after attempting to break parity and Canadian government bonds rallied ahead of the Bank of Canada’s rate decision.

Overnight indexed swaps and BAX contracts are pricing in a 95% chance the Bank of Canada will cut the target rate by a half point to 3.00% at 9 a.m. EDT on Tuesday. Max Clarke, fixed income strategist at IDEAglobal, said CGBs were helped by firming expectations of a rate cut.

“Whoever was sitting on the sidelines is coming in now and that’s being reflected,” Clarke said.

Yields on two-year Canadian government bonds were down 2.0 bps to 2.84%, five-year yields down 2.7 bps to 3.16%, 10-year yields down 2.6 bps to 3.66% and 30-year yields down 2.3 bps to 4.12%. Toronto's S&P TSX composite index closed up 81.59 points to 14318.65. The Canadian dollar was down 0.20 cents to 0.9941 against the USD (1.00591 USD/CAD).

In the U.S., the Bank of America reported a disappointing set of figures and that led to a decline in stocks and U.S. dollar weakness. The Dow Jones Industrial Average closed down 24.34 points to 12825.02, the S&P 500 down 2.17 points to 1388.16 and the NASDAQ up 5.07 points to 2408.04.

The U.S. dollar was down 0.49 to 103.18 against the yen and the euro up 1.10 cents to 1.5927 against the U.S. dollar. The pound sterling was down 1.60 cents to 1.9817 USD and the Australian dollar was higher by 0.80 cents to 0.9424 USD. The U.S. Dollar Index was down 0.393 points to 71.619.

Treasuries were soft despite the weakness in stocks and absence of good fundamental news. U.S. two-year yields were up 4.2 bps to 2.17%, five-year yields up 2.8 bps to 2.93%, 10-year yields up 0.6 bps to 3.71% and 30-year yields down 1.9 bps to 4.48%. The Eurodollar June 08 contract was up 2.5 ticks to 97.12. The 10/2 year spread flattened 2.9 bps to 154.23.

“The market continued along its downward trajectory on Monday, owing to very little fundamental information, but rather an ongoing correction that we believe has nearly run its course,” wrote David Ader, U.S. government bond strategist at RBS Greenwich Capital, in a note to clients.

Overseas fixed income is outperforming North America.

Yields on UK two-year bonds were down 2.4 bps to 4.34%, five-year yields down 4.0 bps to 4.37%, 10-year yields down 5.5 bps to 4.67% and 30-year yields down 3.3 bps to 4.57%.

The UK rally followed a Bank of England plan to allow UK banks to swap mortgage-backed assets for government bonds, which is in the pipeline. The central bank said the preliminary size of the plan is likely to be around £50 billion, with an asset swap permitted for a period of one year, which may be renewed for a total of three years.

UK government debt was also aided by a Rightmove report on UK housing that showed year-over-year house prices increased by only 1.3% in April following a 5.0% gain in March. The property website noted that the drop indicated sellers were recognizing that a decade of rising UK house prices had come to an end.

In Germany, returns on two-year German Bunds were down 3.6 bps to 3.80%, five-year yields down 4.8 bps to 3.87%, 10-year yields down 1.8 bps to 4.12% and 30-year yields down 1.0 bps to 4.66%.

European Central Bank Governing Council member Klaus Liebscher said record-high oil prices are beginning to push up wages and noted that “second-round effects are appearing in some countries in the euro area.” Liebscher said that even though risks to the euro zone economy were on the “downside,” there is no room to cut rates.

Fellow ECB Governing Council member Axel Weber said that, with upward risks to prices prevalent in the medium term, the ECB will determine whether current interest rates are sufficiently high.

European stock markets closed with the Eurostoxx down 32.90 points to 3165.53, the UK FTSE 100 down 3.50 points to 6053.00 and the German DAX down 56.53 points to 6786.55.

Futures on WTI crude oil are up $0.67 to $116.83 while gold futures at the Chicago Board of Trade are up $2.90 to $918.10.

All data taken at 4:05 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Cristina Markham, cmarkham@economicnews.ca

(END) ©CEP Newswires - ©CEP News Ltd. 2008. All Rights Reserved. www.economicnews.ca

 

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