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Hi all,

Bank of Canada raise short term interest rate by 1% in July.
However, mid and long term Government of Canada benchmark bond yields decreased by more than 50bps.
How do we explain this?
Thanks.
 

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How do we explain this?
The BoC sets the overnight rate (the cash rate) whereas the bond market sets the bond yields. So it's different people setting these different rates.

One possible explanation is that the bond market is anticipating an economic slowdown / recession. They may be looking ahead to the future, and thinking the BoC will not keep raising rates into next year because of the weakening economy and easing inflation. The bond market seems to think that the imminent recession is going to make inflation less of a problem, and not lead to continuous BoC rate hikes.

Alternatively, the bond market may be in denial about inflation and the BoC's tightening path. The bond market may be failing to 'read the writing on the wall', with persistent inflation. Investors are pricing bonds as if inflation is going to subside in the coming years. They might simply be wrong, and inflation might continue to force the BoC to raise rates longer than bond investors expect.
 
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