FX.co ★ Canada 10-Year Bond Yield Retreats from 2-Month High

The yield on Canada's 10-year government bond has decreased to below 3.23%, down from the two-month high of 3.26% reached on November 19th. This decline is attributed to a reduction in U.S. Treasury yields and a more dovish outlook from the Bank of Canada, which have counteracted the upward pressure anticipated from the increased bond supply suggested by the new budget. In October, headline inflation moderated to approximately 2.2%, and housing starts dropped by around 17%, weakening the justification for elevated Canadian real yields and diminishing the inflation premium factored into long-term bonds. Furthermore, the Bank of Canada's interest rate cut in October to 2.25%, along with market expectations tilting towards no change in rates in December, has lessened the short-term hawkish outlook that might have otherwise sustained higher yields. Nonetheless, the recently approved budget and the accompanying wider fiscal deficit are anticipated to exert upward pressure on yields over time, as they necessitate a larger issuance of federal bonds.