A look at the global and domestic forces that shaped Canadian bond yields during the week of June 17-24, 2025.
A global flight to safety, triggered by signs of a cooling U.S. economy and easing Mideast tensions, pulled Canadian bond yields decisively lower, a cumulative drop of 11 basis points for the week.
The downward march in the 5-year Government of Canada bond yield was a direct reaction to major events outside our borders. A timeline of weakening U.S. data and de-escalating geopolitical risk set the tone for a global bond rally.
While global forces pulled yields down, the Bank of Canada faced a difficult domestic picture. A slowing economy argues for rate cuts, but persistent underlying inflation demands caution, creating a policy standoff.
6.9%
Rising Unemployment
A weakening labour market signals a cooling economy, typically creating space for interest rate cuts to support growth.
3.0%
Sticky Core Inflation
The BoC's preferred core measures remain at the top of the target range, preventing a decisive pivot to easier policy.
May's headline CPI of 1.7% seems low, but it's artificially suppressed by the removal of the federal carbon tax. The Bank of Canada is focused on the stickier core measures that paint a more hawkish picture.
With the BoC in a holding pattern, Canadian markets have become highly sensitive to U.S. economic signals. Weaker data south of the border was the primary catalyst for the week's rally in Canadian bonds.
Canada's softer labour market and stickier core inflation create a unique policy challenge compared to the United States, justifying different paths for their central banks.
-0.9%
U.S. May Retail Sales
This unexpected drop in U.S. consumer spending was the key trigger, strengthening the case for a Federal Reserve rate cut and sparking a global flight to the safety of government bonds.
Geopolitical tensions added an inflation risk premium to oil prices, but news of a potential ceasefire in the Middle East caused a sharp reversal, providing relief to global bond markets by lowering inflation expectations.
The biggest long-term threat remains U.S. trade policy. Tariffs simultaneously slow Canadian growth while pushing up inflation, creating a policy nightmare for the Bank of Canada and justifying a lower long-term interest rate path versus the U.S.
U.S. Tariffs Imposed
Slower Economic Growth
(Reduced exports & investment)
Higher Inflation
(Higher input & consumer costs)
BoC Policy Paralysis
(Uncertainty clouds outlook)