Canada’s Two-Year Bond Yield Falls As Traders Price In Rate Cuts

The yield on Canada’s short-term bonds has suffered its biggest two-day drop in more than 25 years as investors bet that the Bank of Canada will cut interest rates in coming months.

Bond traders are now betting that Canada’s central bank will not just pause interest rate increases but will be forced to cut rates to counter the fallout from the failure of several regional banks in America.

The benchmark yield on Canada’s two-year bonds fell more than 41 basis points to 3.538% in Toronto trading, bringing the total decline since March 9 to 61 basis points.

The last time the two-year bond declined that much over two trading sessions was in October 1995.

Traders are now pricing in 50-basis points of rate cuts from the Bank of Canada by July of this year. Only a week ago, traders were expecting the next move by the central bank to be an interest rate increase.

The repricing comes following the collapse of regional U.S. lenders Silicon Valley Bank and Signature Bank, developments that have caused turmoil in financial markets.

Some analysts and politicians are blaming the bank failures in America on the fact that the U.S. Federal Reserve raised interest rates aggressively over the past year to dampen inflation that was running at a 40-year high south of the border.