Canadian bonds gain following weak crude oil prices, Poloz’s dovish speech

The Canadian government bonds gained Tuesday as crude oil prices declined more than two percent following Iran’s comments that stalled hopes for an agreement by major oil producers to cap or freeze output.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 3 basis points to 0.965 percent, the yield on long-term 30-year note dipped 2 basis points to 1.643 percent and the yield on short-term 2-year bond slid nearly 1 basis point to 0.492 percent by 13:40 GMT.

The Canadian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Canada's target. Crude oil prices fell more than 2 percent as investors cashed in profits after relishing previous three percent jump in prices. The International benchmark Brent futures fell 2.60 percent to $46.68 and West Texas Intermediate (WTI) dipped 2.70 percent to $44.69 by 12:30 GMT.

Moreover, Bank of Canada Governor Poloz said that increased trade integration could make it more challenging for central banks to maintain inflation targets. He added that the bank's conjecture is that increased integration will make the economy less responsive to both interest rate and exchange rate fluctuations. Bank's models suggest central banks that ignore effects of integration will react too gradually to external shocks. Also, he said that the effects of fluctuations in domestic interest rates and exchange rates on domestic economy may lessen as economies become more integrated.

Further, Poloz said that domestic inflation may come to be driven more by global demand and supply, less by domestic forces. Also, policy-makers must acknowledge that international developments will influence economies and volatility of financial markets. It will take 3 to 5 years for the Canadian economy to recover from the impact of lower oil prices. Lastly, he added that policy-makers trying to counter integration effects could consider automatic fiscal stabilizers, or widening inflation-target bands.- Rtrs

Lastly, Canadian stocks may struggle to continue its winning track Tuesday morning amid sluggish commodities.

The S&P/TSX Composite Index fell 0.53 percent at the close of the trading session to 14,619.46 on Monday.