Canadian bonds slump as BoC keeps policy rate steady, crude oil rallies

The Canadian government bonds slumped Thursday after the Bank of Canada maintained its key interest rate on hold at 0.5 percent. Also, rebound in crude oil prices discouraged investors from being risk averse.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 2 basis points to 1.007 percent, the yield on long-term 30-year note dipped 1-1/2 basis points to 1.614 percent and the yield on short-term 2-year bond slid nearly 1 basis point to 0.561 percent by 12:30 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.

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.

Moreover, 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 rebound after the US crude stocks surprisingly plunged by 12.1 million barrels last week, data from the American Petroleum Institute showed after market settlement on Wednesday, compared with expectations for an increase of around 200,000 barrels. The International benchmark Brent futures rose 1.56 percent to $48.73 and West Texas Intermediate (WTI) jumped 1.67 percent to $46.26.

Lastly, Canadian stocks are set to open a stronger session as rebounding oil prices could drive gains in the energy sector.

The S&P/TSX Composite Index fell 0.11 percent at the close of the trading session to 14,796.65 on Wednesday.