Investment Q&A

Both XLB and long-term bond yields have been flat for roughly 1.5 years. The technical reason for bond price weakness is partially due to Central Banks conducting Quantitative Tightening (QT), where a specific value of bonds are sold each month, but also largely due to a growing expectation of rate cuts being pushed further out. The further rate cuts are pushed out, the more that 'higher-for-longer' becomes a reality, and the more closely bond yields and the Central Bank interest rates should trade. 

Each hotter-than-expected inflation reading causes expectations for rate cuts to be pushed further into the future, and thus bond yields attempt to close the gap between the Central Bank rate and long-term bond yields. 

The Canadian economic landscape is very different from the US at the moment - where Canadian inflation is 2.7%, core inflation is 1.6%, GDP is 0.9%, and the US has an inflation rate of 3.4%, core CPI of 3.6%, and GDP growth of 2.9%. But, Canadian bond yields have continued to rise alongside US bond yields. This is because the Canadian Central Bank is unlikely to cut rates at a much different pace and timing than the US, and while there will be some slight time delays, due to the foreign exchange rates, rate cuts are likely to be closer together than what the current data suggests. 

If we see soft inflation readings come through in the coming months, we can expect yields to turn lower, thus raising bond prices.