FX.co ★ Canada 10-Year Bond Yield Eases Further

The yield on the Canadian 10-year government bond dipped below 3.14%, retreating from the two-month high of 3.26% it reached on November 19th. This movement mirrors the downward trend of US Treasury yields, influenced by recent soft US data and dovish comments from the Federal Reserve, indicating a potential easing stance. Domestically, the Bank of Canada's October rate cut to 2.25%, along with its data-dependent guidance, has reduced the likelihood of a prolonged higher interest rate path, subsequently decreasing the policy risk priced into longer-term securities. Key economic indicators in Canada have softened sufficiently to diminish the growth and inflation pressures that typically drive long-term yields higher. For instance, headline inflation reduced to approximately 2.2% in October, and housing starts saw a staggering 17% decline in the same period, weakening the case for increasing real yields in the near term. Nevertheless, the recent budget approval and a resulting wider fiscal deficit stand as counterbalancing factors, expected to exert upward pressure on yields in the long run due to increased federal borrowing.