FX.co ★ Canada 10-Year Bond Yield Holds Near 2-Month Highs

The yield on Canada's 10-year government bond has remained above 3.22%, approaching a two-month high. This is a result of a convergence of domestic factors that are increasing term premiums, despite a decline in headline inflation. Core inflation remains around 3%, combined with robust labor data, including an unemployment rate of 6.9% and wage growth near 4%, maintaining upward pressure on anticipated inflation. This situation diminishes the argument for rapid monetary easing. The Bank of Canada has reduced the policy rate to 2.25% but has communicated a data-dependent approach, which has led markets to be less certain about further rate cuts and has postponed the anticipated trajectory for easing. Concurrently, Canada's Budget for 2025 anticipates increased marketable issuance to cover an estimated C$78.3 billion deficit for the 2025–26 period, channeling significant issuance into the 10-year and longer maturities. In a stress test, the Parliamentary Budget Officer assigned a mere 7.5% probability of achieving the government's target deficit of 1.5% of GDP by 2029–30, which diminishes credibility and compels investors to seek higher returns for duration risk.