Canadian government bond yields declined further in February based on the impact to growth from tariff policy from the U.S. on Canadian exports materializing, according to a new report from FTSE Russell.
Tariff risk is weighing down the entire Canadian segment including government bonds and Canadian credit. However, the risk that reciprocal tariffs may push up Canadian inflation tempered the decline in yields, the report noted.
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It said the Bank of Canada could be eyeing another easing of interest rate policy in March after citing tariff risk for Canadian growth and exporters in its decision to bring policy rates down to three per cent. On Wednesday, the BoC cut the rate to 2.75 per cent.
Canadian government spreads between seven and 10 years fell sharply compared to its Group of Seven peers in the month of February, the report said, based on expectations of further easing by the Bank of Canada once the U.S. tariffs on Canadian imports were confirmed.
It also noted Canadian exports and imports with the U.S. surpassed $1 trillion in 2024, more than all other trade partners for the country. The U.S. represents 76 per cent of the entire Canadian export market with energy, metals and automobile representing the leading industries.
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The latest consensus real gross domestic product forecast shows Canada is expected to increase its GDP up to 1.8 per cent in 2025 compared to 1.3 per cent in 2024 and up to 1.9 per cent in 2026.
U.S. President Donald Trump’s tariff threats also impacted global growth forecasts denting any positive market sentiment and reviving stagflation concerns, it said. Despite the current uncertainty, U.S. Treasuries rallied as at the end of February leading G7 yields in the seven-to-10-year range.