FX.co ★ Canada 10-Year Bond Yield Rebounds After BoC

The yield on Canada's 10-year government bonds is approaching 3.1%, recovering from the low levels observed in April. This follows the Bank of Canada's recent decision to reduce the policy rate by 25 basis points, bringing it down to 2.25%, and indicating that this reduction is likely the final step in their easing measures, rather than the start of a prolonged easing cycle. This decision was made amidst a challenging macroeconomic environment, with the second quarter's GDP shrinking by 1.6% and a weakening labor market, despite a temporary increase in payrolls by 60,000, which kept unemployment around 7.1%. Inflation remains a concern, with the headline Consumer Price Index (CPI) rising by 2.4% year over year, and the Bank's Trimmed measure close to 3.1%, limiting expectations for further rate cuts. The markets had largely anticipated the rate cut and reacted by focusing on the Bank's emphasis on data-driven future guidance, thereby reducing the likelihood of additional easing and causing yields to rise. Meanwhile, ongoing uncertainty over US trade policies and tariffs, alongside Canada's efforts to strengthen trade relations with Asia, continue to heighten external risks and maintain a cautious market sentiment, which further supports an increase in long-term yields.