Canada 10-Year Yield Falls as Trade Risks Rise

The yield on Canada’s 10-year government bond fell to about 3.67% after touching a more than two-year high of 3.76% on August 21st, as a re-escalation in the trade war with the US put Canada’s economic recovery at risk. US President Donald Trump said tariffs on all Canadian cars, trucks, automotive parts and steel would rise to 50% on January 1, 2027. This came after Prime Minister Carney vowed to retaliate against the initial series of US tariffs imposed after trade talks fell through. Washington imposed 50% tariffs on furniture, plastics, plywood and electrical equipment, adding to existing 25% tariffs on steel, lumber and autos. Risks to growth from higher tariffs have reduced the case for a BoC rate hike this year. Growth is now expected to contract just as the economy has started to recover. In July, Canada added 75,000 jobs, while inflation edged up to 2.9%, largely due to gasoline prices rather than broad-based price pressures.

Canada’s 10-year government bond yield rose to 3.76%, its highest level since April 2024, as a global selloff in government bonds pushed long-term borrowing costs across developed markets to multiyear highs. The move tracked higher US Treasury yields, which rebounded after losses triggered by the Treasury Department’s announcement of a larger bond buyback. Global yields had previously surged on rising US Treasury yields, as increased credit supply and persistent inflation risks fueled a broader aversion to longer-maturity bonds. Oil prices remained elevated near multi-month highs, adding to inflation concerns. In contrast, weaker-than-expected retail sales indicated softer consumer spending and reinforced expectations that the BoC will keep interest rates unchanged next week. However, stronger-than-expected factory sales and a resilient labor market provided a counterpoint, while the economy is estimated to have expanded at an annualized 3.4% in 2Q26, above the BoC’s 2.5% forecast.

Canada’s 10-year government bond yield rose to 3.68%, approaching the over-two-month high of 3.72% touched on August 10th, following stronger-than-expected manufacturing sales data. Canadian factory sales rose 0.1% in June from May, beating expectations for a decline and marking a fifth consecutive monthly gain, while sales volumes increased 1.2%. Recent data also showed a stronger Canadian labor market, while Canada’s economy is estimated to have expanded at an annualized 3.4% in the second quarter, well above the Bank of Canada’s 2.5% forecast. The strong macroeconomic data raised expectations for a potential BoC rate hike if energy prices remain elevated. In July, the Bank of Canada held its policy rate at 2.25% for a sixth consecutive meeting, noting that the economy was adjusting to recent shocks and that energy-driven inflation pressures were easing. However, policymakers warned that inflation expectations remained elevated and questioned the durability of the recovery.