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Canadian Government 10-Year Notes Fall for 1st Time in Six Days

Canada’s 10-year notes dropped for the first time in six days, ending the longest winning streak in three months, after a report yesterday showed that gains in inflation slowed.

A decline in Canadian government bonds pushed yields on the benchmark security up after they lost 20 basis points over five days. Canada’s consumer price index, a measure of inflation, increased 2 percent in November from a year earlier, compared with 2.4 percent in October, Statistics Canada said yesterday. The Canadian dollar rose for the first time in five days.

“Bond buyers have stepped back, not in a huge way, but enough to stall the rally,” George Davis, chief technical analyst for fixed income and currency strategy at Royal Bank of Canada’s RBC Dominion Securities in Toronto, wrote in an e-mail. “We’re seeing a bit of position-squaring and profit-taking after yesterday’s CPI.”

The 10-year yield increased two basis points, or 0.02 percentage point, to 3.17 percent at 5:06 p.m. in Toronto. It touched 3.37 percent on Dec. 14, the highest level since June. The price of the 3.5 percent security maturing in June 2020 dropped 21 cents to C$102.69. The note’s last five straight days of gains ended Aug. 3.

The 30-year bond yield rose one basis point, its first increase in six days, to 3.56 percent after earlier touching 3.55 percent, the lowest level since Dec. 1. The two-year note yield advanced four basis points to 1.66 percent.

U.S. Auction Impact

Canadian investors are concerned that selling pressure from the U.S. Treasury market, “which Canada takes its cues from,” will weigh on prices in thin markets between the Christmas and New Year’s Day holidays, Mohammed Ahmed, a rates strategist at Canadian Imperial Bank of Commerce in Toronto, said in a telephone interview.

The U.S. is selling two-, five- and seven-year notes in three auctions starting Dec. 27. It will offer $99 billion of the debt, unchanged from its last sales of the three maturities in November, according to a Bloomberg News survey of 13 of the Federal Reserve’s 18 primary dealers. The sizes of the auctions will be announced tomorrow.

The Bank of Canada, which next meets Jan. 18, left its benchmark interest rate at 1 percent on Dec. 7 for a second straight time to gauge the global economic recovery after three increases. The Fed has maintained its key rate in a range of zero to 0.25 percent since December 2008.

Loonie Rises

The Canadian central bank’s overnight rate will hold steady through the end of March 2011 and then rise to 1.25 percent by June 30 and 1.5 percent by the end of September, according to the weighted average of 23 forecasts by economists in a Bloomberg survey.

The Canadian dollar, called the loonie for the image of the aquatic bird on the C$1 coin, strengthened after crude oil, the nation’s biggest export, reached the highest level in more than two years. The loonie pared earlier gains after data showed third-quarter gross domestic product in the U.S., Canada’s biggest trade partner, rose less than forecast.

The currency appreciated 0.4 percent toC$1.0132 per U.S. dollar, compared with C$1.0171 yesterday. It touched C$1.0272 on Dec. 1, the weakest level in December. One Canadian dollar buys 98.70 U.S. cents.

The loonie fell for four straight days through yesterday, the longest losing streak in two months. Toronto-Dominion Bank said yesterday it agreed to buy auto-finance company Chrysler Financial Corp. from Cerberus Capital Management LP for $6.3 billion in cash.

‘Playing Catch-Up’

The Canadian dollar’s performance is “likely more flow-driven, with the market playing catch-up,” Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia’s Scotia Capital unit, wrote in a note to clients, “as participants digested news from the announcement” of TD’s purchase.

The loonie has gained 3.2 percent in 2010 in a measure of 10 developed-nation currencies, Bloomberg Correlation-Weighted Currency Indexes showed. The Australian dollar strengthened 11 percent, while the U.S. dollar depreciated 1 percent.

Crude oil for February delivery rose 0.7 percent to $90.45 a barrel today in New York. It touched $90.80, the highest level since October 2008.

U.S. gross domestic product expanded at a 2.6 percent annual rate in the third quarter, figures from the Commerce Department showed today. The revised increase was less than the median forecast of a 2.8 percent gain in a Bloomberg News survey. It compared with a 2.5 percent estimate issued last month.

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