Canadian bonds continue to trade lower as BoC remains optimistic on economic growth

The Canadian government bonds continued to trade lower Friday after the Bank of Canada maintained its key interest rate on hold at 0.5 percent as the central bank continues to anticipate a sound economic growth in the second half of 2016.

The yield on the benchmark 10-year bond, which moves inversely to its price, rose 3-1/2 basis points to 1.118 percent, the yield on long-term 30-year note climbed 3 basis points to 1.727 percent and the yield on short-term 2-year bond jumped nearly 1 basis point to 0.577 percent by 11:40 GMT.

The Bank of Canada maintained its key interest rate at 0.5 percent yesterday during the policy meeting. The Canadian central bank continues to anticipate a sound economic growth in the second half of 2016 as the economy rebounds from the setback suffered in the second quarter. The BoC seems to be highly worried regarding the global growth backdrop, especially the outlook of U.S. The central bank appears to be less certain about the outlook for U.S. business investment, underlining the weaker-than-anticipated second quarter performance.

Moreover, the Bank of Canada also raised concerns about Canada’s economic outlook. The exports in second quarter were described as weaker than expected. Even if the same special factors and infrastructure activity are likely to stimulate growth in the second half of 2016, the central bank noted that “the ground lost over previous months raised the possibility that the profile for economic activity will be somewhat lower than anticipated in July”, noted TD Economics in a research report.

The BoC sees rise in financial vulnerabilities in spite of preliminary signs of ‘possible moderation in the Vancouver housing market’. Even if inflation continues to be roughly consistent with the central bank’s projections, the balance of risks around the inflation profile are witnessed as skewed to the downside relative to earlier projections, said TD Economics.

In addition, 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. Crude oil prices fell more than 1 percent after settling more than 4 percent higher Thursday as investors cashed in profits after relishing previous gain. The International benchmark Brent futures fell 1.60 percent to $49.18 and West Texas Intermediate (WTI) dipped 1.26 percent to $47.02 by 11:40 GMT.

Lastly, Canadian stocks may struggle to continue its winning track Friday morning amid sluggish commodities.

The S&P/TSX Composite Index rose 0.04 percent at the close of the trading session to 14,803.26 on Thursday.