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The Canadian bonds traded nearly flat on Wednesday, as investors were cautious ahead of Bank of Canada (BoC) May monetary policy meeting. The yield on the benchmark 10-year Treasury note, which moves inversely to its price hovered at 1.366 percent and the yield on the short-term 2-year Treasury bond remained unchanged at 0.629 percent by 1250 GMT.
The Bank of Canada is expected to hold steady on interest rates at 0.5 per cent when it meets next week, but rate cut later in 2016 cannot be ruled out. Energy sector remains the BoC’s main concern as rally in oil price is showing first signs of stalling. That suggests the BoC will remain on guard and is likely to remain in dovish mode despite recovery in oil price and despite the expected thrust for growth provided by the new government’s fiscal policy.
The BoC last year updated the extraordinary tools it has at its disposal, which include negative interest rates, forward guidance, large-scale asset purchases and funding for credit. The budget released by the new Liberal government earlier this year is also "appropriate" with its spending on infrastructure to boost growth.
“The Bank hopes that fiscal stimulus will provide a lift to the economy, but we doubt the Federal government’s infrastructure plans will make much of a difference in the near term. Accordingly, we still expect the Bank to cut interest rates later this year,” said David Madani at Capital Economics.
In an annual assessment of Canada's economy earlier this month, IMF said that the Bank of Canada's decision to cut rates last year, along with the depreciation of the Canadian dollar, have helped to cushion the effects of cheaper oil, which is a major export for Canada. Although the central bank should consider moving again if necessary, room for additional cuts is limited with rates already at 0.50 percent, the report noted.
Moreover, future course in bond prices are likely to be ruled by the movements in the crude oil market. The International benchmark Brent futures rose 1.50 percent to $49.34 and West Texas Intermediate (WTI) jumped 1 percent to $49.90 by 1250 GMT.
