Canadian bonds slump as crude oil prices rebound following drop in U.S inventories

The Canadian government bonds slumped Wednesday as the crude oil prices rebounded after a surprisingly large drop in U.S. crude inventories data. Also, markets now look ahead to the September FOMC statement, accompanied by updated economic projections and Fed Chair Yellen’s post-statement press conference.

The yield on the benchmark 10-year bond rose 1 basis point to 1.171 percent, the yield on long-term 30-year note also bounced nearly 1 basis point to 1.797 percent and the yield on short-term 2-year bond climbed 1 basis point to 0.579 percent by 13:00 GMT.

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. The crude oil prices rebound as the United States American Petroleum Institute (API) crude inventories dropped by 7.5 million barrel to 507.2 million barrels, double than the market expectations. The International benchmark Brent futures rose 1.24 percent to $46.46 and West Texas Intermediate (WTI) jumped 0.32 percent to $43.44 by 13:10 GMT.

Moreover, Bank of Canada Governor Stephen Poloz said that July Canadian export gain provides some reassurance and large recovery in the level of non-commodity exports. He further said that weakness in export data is still unexplained and the level of export still remains a problem, even with a recovery.

Added that output gap and exports are behind tilt downward in inflation risks and the US economy is seeing a recovery, but it's unclear if the BoC will cut forecasts in October.

Moreover, investors will remain keen to focus on the upcoming consumer inflation and retail sales data scheduled to be released on Friday.

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

The S&P/TSX Composite Index rose 0.18 percent at the close of the trading session to 14,521.98 on Tuesday.