Canadian bonds drift higher

The Canadian bond prices drifted higher on Friday, benefiting mildly from weakness on North American equity markets.
Although the Bank of Canada moved to a bias to tighten, it left open the timing of a rate rise and this uncertainty has kept a lid on any significant swing in bond prices. Rising rates make bonds' fixed payments look less attractive by comparison.
The two-year bond rose 6 Canadian cents to C$99.72 to yield 3.156 percent, while the 10-year bond gained 17 Canadian cents to C$103.75 to yield 4.725 percent.
The yield spread between the two-year and 10-year bond moved to 156.9 basis points from 155.9 basis points.
The 30-year bond, due 2029, added 23 Canadian cents to C$106.74 to yield 5.260 percent, while the US 30-year treasury yielded 5.168 percent.
The three-month when-issued T-bill yielded 2.08 percent, up from 2.07 percent at the previous close.
The Canadian dollar fell against a buoyant US currency on Friday, although firmly range-bound, as the greenback was boosted by a rosy assessment of the US economy from Federal Reserve Chairman Alan Greenspan earlier this week.
The Canadian dollar ended the North American session at C$1.3212 to the US dollar, or 75.69 US cents, down from C$1.3169, or 75.94 US cents, at Thursday's session close.
"There was news out today, no data. Dollar/Canada, in terms of movement, was just sort of range-bound today," said a trader at a major Canadian bank. "Canada's held in very, very well on the crosses."
Despite the decline, the Canadian dollar fared better against the greenback's rally than did other currencies. The US dollar rose 1 percent against euro, Swiss franc and Australian dollar.
Expectations for domestic interest rate hikes coupled with some oil settlement flows - when Canadian oil exporters turn revenues received in US dollars into domestic currency - may have helped the Canadian unit withstand the greenback's rally.
In the absence of economic data on Friday, there was time to further mull positions on when the Bank of Canada may raise interest rates. In Thursday's session, the market interpreted the central bank's Monetary Policy Report Update as a clearer sign that the bank is poised for a period of higher rates.