Canadian fixed income yields are de-coupling from a sharp rise seen in the U.S. market, according to a new report from FTSE Russell.
Despite a target interest rate cut of 50 basis points to 3.75 per cent from the Bank of Canada at the end of October, the market witnessed higher Canadian yields in October as well as a curve steepening, the report noted.
Read: Interest rate cut boosts returns from short-term government bonds, credit: report
The U.S. and U.K. witnessed sharp increase in yields due to stronger economic data, the report said, noting Canadian seven- to 10-year yields were pulled higher by U.S. yields.
The report also noted the rate cuts from the Bank of Canada have become more aggressive compared to an initial gradualist approach after inflation fell sharply to sub-target levels. The move adds some concern about recession risks in Canada, it said.
The performance curve of Canadian government bonds returned to levels seen prior the start of the coronavirus pandemic.
According to a forecast from the International Monetary Fund, Canada’s economy is expected to double to 2.4 per cent in the 2025-2026 period. Even though most of the leading economies have successfully avoided a recession in 2024, the IMF’s projections show there’s increased risk from stagflation effects given the significant differences in regional economic growth in the medium term.
Read: Canadian fixed income outperforms amid improving interest rate landscape: report