Canada 10-Year Yield Steady After BoC Rate Hold

Canada’s 10-year government bond yield held steady near 3.5% after the Bank of Canada left its benchmark interest rate unchanged at 2.25%, in line with expectations. The central bank noted that uncertainty remains elevated amid escalating tensions in the Middle East and new US tariff proposals, while reiterating that it stands ready to act if necessary and will not allow higher energy prices to feed persistent inflation. Markets continue to price in a 25bps rate hike by December. However, the 10-year yield remains below its May highs, tracking a decline in US Treasury yields as investors speculate that a potential US–Iran agreement could help ease geopolitical tensions.

Canada's 10-year government bond yield rose to 3.43% in early June as escalating trade tensions and renewed conflict in the Middle East increased inflation concerns. Tensions in the Gulf intensified after Iranian attacks on Kuwait, while US strikes near the Strait of Hormuz and limited diplomatic progress clouded prospects for a resolution. Oil prices remained above $95 per barrel, fueling worries about energy-driven inflation and supporting higher bond yields. Meanwhile, the Bank of Canada is widely expected to leave interest rates unchanged at next week's meeting and avoid signaling a clear tightening bias. Weak domestic demand and a slowing economy continue to limit underlying inflation pressures, reinforcing expectations of a neutral policy stance.

Canada's 10-year government bond yield fell to 3.45% from the two-year high of 3.7% touched on May 19th, tracking similar moves in the US as the outlook of soaring inflation was tamed by a pullback in energy prices. The US and Iran signaled they were closer to agreeing on a deal to end the war and restore energy supply from the key region. Despite fresh strikes that dented optimism on a deal, the drop in energy costs aligned with the Bank of Canada's signal that it does not see high energy prices spreading to inflation in core sectors of the economy. Likewise, the latest inflation report indicated that the Bank of Canada’s preferred core inflation gauges slowed more than expected to their lowest levels in five years. In turn, the GDP is expected to have been flat in the first quarter, also supporting the case for lower rates.