Bond markets impose a premium and Canada gets swept up in it, KPMG Canada's chief economist says
The Government of Canada five-year bond yield neared four percent on Monday, almost 100 basis points above its level a year earlier, with nearly 40 percent of the increase coming in the past month.
Financial Post carried the figures alongside a revised call from KPMG Canada, which now expects one 25-basis-point increase at the Bank of Canada's December 9 meeting after previously forecasting no hikes in the near term.
Ali Jaffery, chief economist at KPMG Canada, said the increase would lift the benchmark lending rate to 2.5 percent, where it would remain for the foreseeable future
In a note on Friday, according to the Financial Post, Jaffery wrote that bond markets are demanding more credible monetary, fiscal, or other policy in a world where capital is in high demand, and said the scale of the moves in bond yields revealed "a shoot-first-ask-questions-later approach to global inflation and fiscal sustainability issues."
Jaffery told the outlet that federal fiscal policy in Canada is "pretty reasonable" and interest rate setting "isn't terrible either" given the state of the economy.
He said the bond market is now imposing a premium and Canada is "being swept up in that."
Jaffery traced a 40-basis-point rise in yields to "the ill-timed hawkish tone from Bank of Canada governor Tiff Macklem" at the September 2 rate announcement, the publication reported, and said the widening spread between US and Canadian rates has devalued the Canadian dollar in a way that could speed up inflation.
Bank of Nova Scotia, UBS AG, Manulife Financial Corp., and Oxford Economics Ltd. are now predicting a hike at the October 28 Bank of Canada meeting.
Jaffery said the Bank of Canada could raise rates once to show it will "remove some monetary accommodation."
The central bank could then return to "wait-and-see mode," Jaffery said, while it watches the energy market and the data.
The benchmark two-year Canada yield stood at 3.235 percent on Tuesday, down 1.8 basis points, while the 10-year fell 3.2 basis points to 3.920 percent, Investing.com reported.
That leaves the 10-year about 68.5 basis points above the two-year.
The Bank of Canada identifies the two- and 10-year Government of Canada securities as key benchmark yields for the market, according to the same site, which also reported that Canada's August trade surplus widened to $4.2bn, above economists' expectations.
Ten-year US Treasury yields rose 12 basis points last week to 5.28 percent, a fifth straight weekly increase and the longest such streak since April 2024, Bloomberg reported.
Two-year yields dropped about two basis points to 4.83 percent, and 10- and 30-year yields both reached levels last seen in 2002.
According to Bloomberg, higher energy prices, booming AI infrastructure spending, a resilient US economy, and competition for capital from corporate and government borrowers have driven months of weakness in the US$32tn Treasury market.
"Rising oil prices, heavy Treasury supply, and a global repricing of long bonds are all pushing in the same direction," said Tracy Chen, a portfolio manager with Brandywine Global Asset Management, in comments to the outlet.
US Federal Reserve Vice Chair Philip Jefferson and New York Fed President John Williams said last week that officials may have room to wait before raising rates again.
Bloomberg added that swaps price about a 20 percent chance of an increase at the October 27 to 28 meeting and about three quarter-point increases over the next 12 months.
CNN reported the S&P 500 rose 0.58 percent on Tuesday to close at a record 7,819 points, its first record high since mid-August.
Technology is the only sector to post gains over the past month, while real estate, financials, and materials have each dropped more than 4.5 percent, and an equal-weight version of the index is down almost 5 percent since its mid-August record.
Ulrike Hoffmann-Burchardi, global head of equities at UBS, wrote in a note carried by CNN that the breadth of the rally has narrowed.
Market gains are increasingly concentrated, and risk should be managed through a "broadly diversified equity portfolio," Hoffmann-Burchardi wrote.
