Canadian bonds gain tracking weak crude oil prices

The Canadian bonds gained on Wednesday as investors poured into safe-haven instruments amid losses in riskier assets including crude oil and global equities. The yield on the benchmark 10-year Treasury note which moves inversely to its price fell 1-1/2 basis points to 1.305 percent and the yield on the short-term 2-year bonds also dipped 1 basis point to 0.601 percent by 12:40 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. Today, crude oil prices fell more than 1 percent to below $50 mark after UAE Oil Minister Suhail Mohammed Al Mazrouei said the market will fix itself to a fair price for consumers and producers, adding that the rules of supply and demand are working. The remarks pour cold water on the probability that OPEC will agree to an output freeze to buoy prices. The International benchmark Brent futures fell 1.80 percent to $49.00 and West Texas Intermediate (WTI) dipped 1.24 percent to $48.49 by 09:20 GMT.

Yesterday, the Canada GDP report revealed an overall +2.4 percent result in 1Q16, versus the unrevised +0.5 percent decrease seen in 4Q15, previous was +0.8 percent. This comes in below market expectations for +2.8 percent result. On Friday, the Fed Chair Yellen on Friday said that if economic gains continue and if the labour market continues to improve that it is appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate. Although lacking a time factor, this continues to point to increased support for a summer rate hike from the FOMC.

The Canadian central bank maintained its key interest rate at 0.5 percent, on par with expectations. The Bank of Canada noted that the outline of the nation’s outlook has been altered amidst the Northern Alberta wildfires, however; it stated that risks to the outlook of inflation continue to be “roughly balanced”.

Even though the Canadian first quarter growth seems to be consistent with the Monetary Policy Report of April, the BoC anticipates that the Northern Alberta wildfires will subtract around 1.25 percentage points from the economic growth in the second quarter, noted TD Economics in a research report.

The Monetary Policy Report had anticipated 1 percent growth on a quarterly annualized basis. It is a possibility that the central bank is tracking a growth contraction for the second quarter, said TD Economics. The BoC projects the economic growth to recover in the third quarter as reconstruction starts and oil production resumes.

Moreover, the global economy is growing widely as anticipated in the April MPR. The Bank of Canada projects the US economy to return to strong growth after expanding softly at the beginning of the year. According to the central bank, Canada’s structural adjustment to the oil price shock is uneven. It emphasized that the softness recorded recently in Statistics Canada’s investment intentions survey as upsetting.