Governor Mark Carney is closing the door on liquidity programs the Bank of Canada started during the credit crisis, just as the Federal Reserve may expand asset purchases to sustain the U.S. economic recovery.

Canada's central bank will reduce the relative amount of bonds available to securities dealers at government auctions, reversing steps it took in 2008 and 2009 that aimed to increase market liquidity. All 18 primary dealers that trade with the Fed forecast officials will announce a resumption of U.S. Treasury purchases though so-called quantitative easing when a two-day policy meeting ends tomorrow.

Bond prices may rise in Canada as there will be less supply for private investors to buy, said Michael Gregory, senior economist at Bank of Montreal in Toronto. Demand for Canadian bonds is rising this year, with record purchases by foreign investors on signs the country will eliminate its budget deficit before other Group of Seven nations.

"The auctions may become a little bit tighter because the bank's taking down a little bit more," said Gregory. The Bank of Canada announcement "has some impact in that it's a slightly larger share."

The bank will auction C$3.5 billion ($3.45 billion) of bonds maturing June 1, 2016, tomorrow and keep a minimum of
C$525 million, or 15 percent, of the bonds on its books. The bank had cut its participation in government bond auctions to as little at 5 percent, as part of an effort to offset assets added to its balance sheet when it supported liquidity through temporary purchases of other securities from bond dealers.

Eoin Treacy's view Fullermoney has maintained for a number of months that the bull market in sovereign bonds has been characterized primary as a momentum trade with speculators seeking to ride of the coattails of central banks. Following this logic, if the Canadian authorities are reducing the supply of new bonds and commensurate purchases, then the inducement to hold an overweight position in the sector is reduced which should put pressure on prices.

Canadian government bonds retested their 2008 peak in August and again in early October. It pulled back last week and appears to be in the process of posting a short-term lower high. A sustained move above 126.66 would be required to question current scope for further downside.