Canadian Bonds Decline on Concern About Accelerating Inflation
Canadian government debt fell, pushing yields on two-year bonds to the highest since 2001, on concern that accelerating inflation will prompt central banks worldwide to raise interest rates.“Inflation fears are back in investors’ minds,” said Sal Guatieri, a senior economist with BMO Capital Markets in Toronto. “That’s got bond investors quite worried, and that will continue to push yields higher.”
The yield on Canada’s two-year bond rose 8 basis points this week, or 0.08 percentage point, to 4.68 percent. It reached a peak of 4.72, the highest since August 2001. The price of the 3 3/4 security maturing in June 2009 fell 12 cents to C$98.27 in Toronto. Yields move inversely to prices.
Guatieri said the two-year bond yield may climb to 4.90 percent by the end of the year.
New Zealand’s central bank raised its benchmark interest rate a quarter-percentage point on June 7 to a record 8 percent. Investors in the U.S. reduced bets the Federal Reserve will need to lower borrowing costs this year.
Yields in Canada climbed for a third-straight week as investors raised bets that the Bank of Canada will increase borrowing costs more than once to stem inflation. The yield on the December bankers’ acceptance contract rose to 4.92 percent from 4.53 percent a month ago on the Montreal Exchange.
The central bank held its target rate for overnight lending between banks at 4.25 percent on May 29 and said it may raise borrowing costs “in the near term” should inflation stay above its 2 percent target. Policy makers next meet July 10.
`Deteriorated’ Inflation Climate
“The Canadian inflation climate has deteriorated during recent months,” said Yanick Desnoyers, a senior economist with National Bank Financial in Montreal. “It’s time to get ready for a new round of monetary tightening.”
Consumer prices, excluding volatile components such as energy, accelerated in April to the highest level in more than four years, Statistics Canada said last month.
Canada’s economy added 9,300 jobs last month after shedding 5,200 positions in April, Statistics Canada said yesterday. Employers were expected to add 14,300 new jobs in May, according to the median of 24 economists’ forecasts in a Bloomberg survey. The unemployment rate held at 6.1 percent.
Guatieri said the Bank of Canada will raise interest rates as soon as July “because economic data has been very supportive of this move.”
The Canadian dollar was little changed this week, closing at 94.24 U.S. cents in Toronto yesterday. One U.S. dollar bought C$1.061.