Canadian bonds slump following recovery in crude oil prices, BoC policy decision in focus

The Canadian government bonds slumped Tuesday as the crude oil prices recovered following an overnight decline after a surprisingly large drop in U.S. crude inventories data.

The yield on the benchmark 10-year bond, which moves inversely to its price, rose 1 basis point to 0.975 percent, the yield on long-term 30-year note also bounced nearly 1 basis point to 1.644 percent and the yield on short-term 2-year bond climbed 1/2 basis point to 0.500 percent by 12:30 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.

Crude oil prices clawed back minor gains in early Asia trade Tuesday following an overnight decline but trading is expected to be muted now that the market has priced in a potential production cut. The International benchmark Brent futures rose 0.70 percent to $51.88 and West Texas Intermediate (WTI) jumped 0.92 percent to $50.40 by 09:00 GMT.

The Bank of Canada (BOC) meets on Wednesday and will announce if there is any change in monetary policy. Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins are scheduled to hold a press conference following the bank's interest rate decision and release of its monetary policy report. We foresee that the BoC will leave its benchmark interest rates on hold.

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

The S&P/TSX Composite Index rose 0.08 percent at the close of the trading session to 14,596.52 on Monday.