Canadian bonds sag on firm energy prices, weak U.S. Treasuries

The Canadian bonds slumped in thin trading activity during a relatively quiet Tuesday session that witnessed data of little significance. Also, major movements in bond prices were due to recovery in energy prices and witnessing a heavy sell-off in U.S. Treasuries.

The yield on the benchmark 10-year bond, which moves inversely to its price, rose 1-1/2 basis points to 1.80 percent, the yield on long-term 30-year Treasury also jumped 1-1/2 basis points to 2.40 percent and the yield on short-term 2-year bond bounced nearly 1 basis point to 0.80 percent by 12:40 GMT.

The Canadian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Canada's target. Crude oil prices jumped as investors expect tighter crude oil market in 2017. The International benchmark Brent futures rose 0.90 percent to $55.41 and West Texas Intermediate (WTI) climbed 0.40 percent to $52.33 by 12:40 GMT.

Following the U.S. debt market, the benchmark 10-year bonds witnessed a heavy sell-off, pushing yields by 4-1/2 basis points to 2.58 percent. We foresee that the bund prices will keep drifting between small gains and losses in quiet trading due to a long global Christmas holidays.

Overnight, the Federal Reserve Chair Janet Yellen commented that the United States is now seeing its strongest labour market in nearly a decade as job creation has continued at a relatively steady pace. Also added that she has seen signs of wage growth improving and that weekly earnings for younger workers are making strong gains.

Moreover, the Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range last Wednesday, as widely expected. The statement noted that information received since the November meeting indicates that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.

Also, the new projections showed that the central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.

Markets will remain keen to focus on the inflation and October gross domestic product (GDP) data scheduled to be released later in this week.

Lastly, Canadian stocks are set to open a stronger session on Tuesday, as rallying oil prices could drive gains in the energy sector.

The S&P/TSX Composite Index rose 0.12 percent to 15,269.85 at the close of the trading session on Monday. While at 12:00 GMT, the FxWirePro's Hourly Canadian Dollar Strength Index remained highly bullish for second straight day at +104.18 (higher than +75 represent a bullish trend).