Canadian bonds slump on Yellen hawkish remarks

The Canadian bonds slumped on Monday after Federal Reserve Chief Janet Yellen suggested that an interest rate hike could be around the corner. The yield on the benchmark 10-year bonds, which moves inversely to its price rose 1-1/2 basis points to 1.373 percent by 13:00 GMT.

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.

Last week, the Canadian central bank maintained its key interest rate at 0.5%, 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% 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.