Yields for long-term Canadian government bonds rose in December on the heels of aggressive rate cuts by the Bank of Canada, according to a new report by FTSE Russell.

It found a bear curve steepening resumed in December, following the Bank of Canada’s 50 basis-point rate cut, as long yields rose and two-year yields were suppressed by lower short rates. It also noted Alberta may be reaping the benefits from U.S. President Donald Trump’s oil-friendly agenda, as the province’s spread nears 30 basis points due to a projected lower debt to gross domestic product of 9.3 per cent compared to Quebec and Ontario’s, which range from 39 per cent to 40 per cent.

Higher and longer Canadian bond yields resulted in higher spreads versus the seven- to 10-year Japanese Government Bond rates in December. Canadian spreads were flat or fell a little compared to Germany’s, while they continued to trade well through treasuries and gilts. As well, long Canadian and German inflation breakevens have converged near 190 basis points, as inflation and policy rates reach similar levels, decoupling from the U.S. and U.K., where rates and inflation are higher.

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Canadian municipal yields bounced back across all maturities in December, following increased uncertainty, found the report. While short Canadian government bond yields fell in December after the Bank of Canada easing, it noted three- to five-year bonds are higher than they were three months ago and 15-year and longer bonds have risen to levels they were at three months ago.

The report also found Canada is expected to deliver roughly two per cent growth in 2025, despite the threat of U.S. tariffs and an election on the horizon. An uptick, albeit from a very low base, in Canadian goods inflation also suggested consumption is improving, buoyed by aggressive rate cuts by the Bank of Canada and a two-month GST/HST tax holiday on essentials that began in December.

It noted the G7 nations should see mostly stronger growth in 2025, with the exception of the U.S., which is forecast to slow to 2.1 per cent growth from 2.7 per cent, and China, which appears to be in a deflationary spiral. It also noted fiscal stimulus is forecasted to lift European growth in 2025.

According to the report, U.S. inflation (and higher-for-longer U.S. interest rates) remains a key policy issue, after rising again in November to 2.7 per cent year over year. Canada’s inflation rate returned to lower than negative two per cent in November after inflation eased on shelter, food and services.

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