FX.co ★ Canadian Yields Fall Further

The yield on Canada's 10-year government bond experienced a notable decline, dropping to 3.2% from a recent peak of 3.4% reached on May 21st. This movement mirrored a retreat in US Treasury yields following a growing consensus that the Federal Reserve is likely to implement multiple interest rate cuts this year. Recent indicators have confirmed that the US economy contracted in the first quarter, and unexpectedly high unemployment claims have reached their highest level since 2021. However, expectations for a less dovish stance from the Bank of Canada have mitigated a more significant drop in bond yields. Persistent signs of higher underlying inflation in Canada prompted markets to adjust expectations, forecasting a smaller series of rate cuts from the Bank of Canada this year. Notably, trimmed-mean core inflation, a key measure, rose to its highest point in over a year. Additionally, retail sales showed a sharp increase for the second consecutive month in April. In light of this robust data, investors shifted their expectations towards the Bank of Canada's June decision, moving away from anticipating a 25 basis point rate cut to anticipating a hold on current rates.