Canadian Bonds Extend Thier Dramatic Selloff

The dramatic selloff in Canadian bonds continued Wednesday, with the Federal Reserve's acknowledgement of an improving U.S. labor market and growth picture still echoing through the market.

The yield for Canada's two-year bond was at 1.224% late Wednesday, up from 1.191% late Tuesday. The 10-year was at highs not seen since early December, yielding 2.154%, up from 2.046%, according to data provider CQG.

The 30-year yield was also at levels not seen since early December, yielding 2.696%, from 2.613%.

Bond yields move inversely to their prices.

"We are stringing together the view that we have seen the low in government bond yields, both in Canada and the United States," said David Tulk, chief Canada macro strategist for TD Securities.

The statement Tuesday from the Fed's policy-making body revealed some economic hopefulness, trampling expectations that the central bank was poised to unleash another round of asset purchases.

That helped drive U.S. and Canadian government bond markets lower, in conjunction with a reduction in European tail risks to the broader global economy.

"Recognizing that we can be a little bit more constructive about the state of the global economy makes you reflect on yields that have been really held low as a result of those issues," Tulk said.

Government bond selling accelerated on a technical breakdown in late morning, as the yield on the 10-year U.S. Treasury benchmark note touched fresh highs for the year, said Fergal Smith, managing market strategist at Action Economics in Toronto. Meanwhile, the 10-year and 30-year yield spreads between the U.S. Treasury benchmark and the corresponding Canadian bonds were delving deeper into negative territory.

While more attractive prices on Canada's highly coveted triple-A rated government securities were attracting some buyers, the rout was nonetheless holding many investors at bay, Smith said.

"It's not more attractive if you believe there is further downside risk," Smith said. "There is hope for a bounce in Canada, but in our view, the selloff will continue from here."

Smith said he is watching for a surge in Canada's 10-year benchmark bond to the late October high of 2.517%.