Canadian bonds strengthen following global debt market; CPI and retail sales in focus

The Canadian government bonds strengthened Thursday following the stronger global debt market. Markets now look ahead to a greater flow of data, highlighted by August consumer inflation and July retail sales data.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 2-1/2 basis points to 1.123 percent, the yield on long-term 30-year note dipped 2 basis points to 1.754 percent and the yield on short-term 2-year bond slid 1/2 basis point to 0.571 percent by 12:50 GMT.

The global bond prices bounced after the Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50 percent range, in line with market expectations. One key highlight of the statement was the note that near-term risks to the economic outlook appear roughly balanced. However, the Committee continues to closely monitor inflation indicators and global economic and financial developments.

After the Fed policy decision, the United States benchmark 10-year Treasury yield fell below 1.65 percent mark, now trading 2-1/2 basis points lower at 1.634 percent by 12:00 GMT.

On Wednesday, Bank of Canada Governor Stephen Poloz said that July Canadian export gain provides some reassurance and large recovery in the level of non-commodity exports. He further said that weakness in export data is still unexplained and the level of export still remains a problem, even with recovery.

Added that output gap and exports are behind tilt downward in inflation risks and the US economy is seeing a recovery, but it's unclear if the BoC will cut forecasts in October.

Moreover, 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. The crude oil prices rebound as the United States American Petroleum Institute (API) crude inventories dropped by 7.5 million barrel to 507.2 million barrels, double than the market expectations. The International benchmark Brent futures rose 1.67 percent to $47.60 and West Texas Intermediate (WTI) jumped 1.81 percent to $46.16 by 12:50 GMT.

Lastly, Canadian stocks are set to open a stronger session on Thursday, as rebounding oil prices could drive gains in the energy sector.

The S&P/TSX Composite Index rose 1.30 percent at the close of the trading session to 14,710.82 on Wednesday.