Canadian government bond yields jumped to multiyear highs on Friday as concerns over inflation, high oil prices and geopolitical uncertainty prompted a sell-off in global bond markets.
For Canadian investors looking ahead to the release of domestic inflation figures on Tuesday, the increases reaffirmed expectations of possible central bank tightening. Higher inflation and interest rates, in turn, could have knock-on effects for Canadians’ investment portfolios and mortgages.
“The market is increasingly concerned that lingering elevated oil prices will result in higher inflation levels that may force the BoC to act by raising rates,” said George Davis, chief technical strategist at RBC Capital Markets, in an e-mailed response to questions.
By Friday afternoon, the benchmark 10-year Canadian government bond yield stood around 3.7 per cent, its highest since late May, 2024, and the 30-year yield rose to 4.02 per cent.
The closely watched five-year yield, which anchors five-year fixed mortgage rates, rose above 3.3 per cent, its highest since July, 2024. That level “will put upward pressure on mortgage rates and further dampen a soggy housing market,” Douglas Porter, chief economist at Bank of Montreal, wrote in a note to clients.
A 30-year yield above 4.05 per cent, which would put long-term yields at their highest level since April, 2010, “would certainly suggest that we are in a higher interest rate environment on a relative basis,” Mr. Davis said. Tightening financial conditions could affect corporate and personal borrowing, he added.
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Surging Canadian yields mirrored jumps in government bond yields across the world this week. With investors concerned about inflation, 30-year U.S. government bonds sold at a 5 per cent yield for the first time since 2007. In Britain, worries about political instability have pushed long-term yields to their highest since 1998, and hotter-than-expected producer price inflation in Japan sparked a sell-off that has also lifted Japanese yields to their highest this century.
Core Canadian inflation metrics have not yet been meaningfully affected by higher prices, making the Bank of Canada unlikely to tighten immediately, Mr. Davis said. But an increase in core inflation levels suggesting broader price pressures “would be expected to elicit a reaction from the BoC and this remains a clear risk in the current environment.”
Data this week showed surging gasoline prices drove the U.S. consumer price index up 3.8 per cent in April from a year earlier, the fastest growth in three years. Many economists expect Canadian inflation, which tends to be correlated with U.S. inflation, to show a similar jump.
The Bank of Canada is scheduled to make its next interest rate decision on June 10. Financial markets are currently pricing in more than two quarter-percentage-point rate hikes by the bank this year.
Jim Gilliland, chief executive officer and head of fixed income at Leith Wheeler Investment Counsel Ltd. in Vancouver, said that rising bond yields followed a period in which markets had discounted long-term effects of war in the Middle East because of expectations that oil prices would quickly moderate.
Stubbornly high prices forced markets to consider additional inflationary risks, with effects visible across the yield curve from short- to long-term rates, he said.
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However, Mr. Gilliland said that yield curves across the world had not steepened significantly – meaning long-term yields have not risen substantially more than short-term yields – indicating that investors are not yet concerned about governments’ financing ability.
“This is sort of a repricing across the curve, and it’s a view that we’re in an environment of probably higher structural energy prices, that this isn’t going to get resolved immediately.”
Mr. Gilliland also cautioned against worrying too much about surging yields, noting that long-term yields above 4 per cent were normal before the financial crisis and didn’t prevent economic growth.
“Having real rates at zero or negative, that’s pretty odd. Having inflation expectations at one-and-a-half [per cent], that’s kind of odd. So I’d say it’s more returning to normal than necessarily a signal of something catastrophic.”
Mr. Davis said higher bond yields and tightening financial conditions would still likely create challenges for bond and equity investors. Bond prices fall as yields rise, and lower interest rates tend to support gains in stock markets.
But from a longer-term perspective, higher yields could benefit investors looking to secure cash flow with a lower risk profile, he said.
“Cash equivalents like high-yield savings accounts also begin to look more attractive given the higher yields as well as the ability to retain liquidity,” he said.