Canada’s 10-year government bond yield slipped to a new three-month low of 3.16%, after an unexpectedly sharp economic downturn strengthened expectations for a more accommodative monetary policy. Markets had been bracing for flat growth, but Statistics Canada instead reported that the economy contracted by 0.6% in the final quarter of 2025, the weakest annual performance in nearly a decade.
The downturn was driven primarily by a steep $23.5 billion drawdown in inventories and a pronounced decline in exports. These factors have added to downward pressure on yields, which is being further reinforced by a global bond rally amid shifting trade policies.
While the United States imposed a 10% global surcharge under Section 122, exemptions granted to trade-compliant Canadian goods have helped shield Canada’s debt market from the more severe volatility seen in other countries. With inflation already easing to 2.3%, the combination of negative growth and protected trade status has bolstered the Bank of Canada’s decision to maintain its policy rate at 2.25%.
