Rate cut seen on horizon as Canadian bonds due in more than a decade yield less than cash

Dated: March 22 2019

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Rate cut seen on horizon as Canadian bonds due in more than a decade yield less than cash

1.67% is the market telling you the next interest rate move will be down

Local yields have fallen in recent weeks, spurred lower by weakening economic data, a more downbeat assessment from the Bank of Canada and a global rally in bonds.Canadian Press/Adrian Wyld

Investors in Canada’s debt market are becoming more convinced that the next interest-rate move from the country’s central bank will be down, with bonds due in more than a decade now yielding less than cash.

An investor has to be willing to lend for around 14 years in order to get more than the 1.75 per cent rate that the Bank of Canada currently has as its overnight benchmark. While Canadian bonds due in 2033 on Thursday yielded around 1.79 per cent, securities maturing in June 2029 offered a rate of just 1.67 per cent.

Local yields have fallen in recent weeks, spurred lower by weakening economic data, a more downbeat assessment from the Bank of Canada and a global rally in bonds. Wednesday’s dovish shift by the U.S. central bank and the market’s more downbeat view on prospect’s for Canada’s southern neighbour added momentum in sovereign bonds and also provide further support for the idea that policy makers in Ottawa will need to cut rates.

“When I look at a bulk of the curve being below the overnight rate, it really says that the BOC will be reluctantly led to cutting rates,” said Ryan Goulding, a fixed-income manager at Vancouver-based Leith Wheeler Investment Counsel Ltd., which manages around $19 billion. But it may not happen until “after a long, disappointing wait” for capital spending to pick up, he said.

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Steven Axford

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