Canada’s benchmark 5-year bond yield rose to its highest levels since April 2010 on Monday as investors prepared for the Bank of Canada to raise interest rates again next month.
Canada’s central bank had raised its main lending rate by 50 basis points last week to contain rising inflation.
Canada’s benchmark 5year bond yield was trading at 3.079% at 11:00AM EDT, up 10 basis points from its previous close.
Canada’s consumer prices in April were 6.8% higher than a year earlier, exceeding the Bank of Canada’s tolerance rate for inflation of 2%.
The rise in bond yields could be a sign that investors are becoming more confident about Bank of Canada’s ability to contain inflation
But the yield rally could also be a sign that investors are losing confidence in the economy as a whole. When investors are worried about the future of the economy, they will often put their money into safe investments like government bonds.
Investors fear that policy-makers’ attempts to rein in inflation may end up taking the economy.
“Every time inflation has risen this sharply, a recession has resulted,” Eric Lascelles, chief economist at RBC Global Asset Management, wrote in a memo last month.
“The inflation itself is no doubt partially responsible for the subsequent recessions,” Lascelles wrote. “However, it should be noted that central bank tightening was also involved in the great majority of episodes.”
Investors also appear to be worried about “stagflation”, a combination of high inflation and slow economic growth.
Russia’s invasion of Ukraine is also negatively impacting economic prospects.
“The war has markedly eroded near-term global economic prospects, point to difficult times ahead,” economist JD Guenette, PG Kenworthy, and CM Wheeler wrote in a recent World Bank paper. “The war is affecting global activity through multiple channels, including commodity and financial markets, trade, migration links, and confidence.”
“The inflationary pressures caused by surging commodity and food prices may accelerate monetary policy tightening, heighten the risk of stagflation, and increase poverty and inequality,” they added.
The Bank of Canada has already made it clear that it needs to raise its key interest rate to three per cent or beyond to stop inflation becoming endemic.
“We’re scared that this inflation becomes entrenched,” deputy governor Paul Beaudry told reporters last Thursday.
