Trump blockade, Macklem comments cause Canada bonds to tumble

Canada bonds tumbled, with the two-year yield up 15.1 basis points to around 3.03 per cent shortly after 3:30 p.m. Photo by Getty Images/iStockphoto

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Canadian government bonds were hammered after the Bank of Canada’s top official raised the prospect of back-to-back rate hikes if energy prices cause broader inflation — just as oil was spiking.

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The central bank held its policy interest rate steady at 2.25 per cent for a fourth consecutive meeting and delivered a mostly neutral message, saying the current level is about right to support growth and keep inflation in check.

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But in opening remarks to his press conference, Governor Tiff Macklem offered up a conditional scenario in which the central bank might have to quickly tighten monetary policy, if elevated oil prices embed themselves in broader price pressures. “If this starts to happen, monetary policy will have more work to do — there may be a need for consecutive increases in the policy rate,” he said.

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Macklem’s news conference started at 10:30 a.m. Ottawa time. Canada’s benchmark two-year note was already selling off at that point, causing the yield to rise. Then Axios reported that U.S. President Donald Trump said he won’t lift a naval blockade of Iran’s ports until he secures a deal to address that country’s nuclear program — causing global oil prices to extend gains.

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Canada bonds tumbled, with the two-year yield up 15.1 basis points to around 3.03 per cent shortly after 3:30 p.m. Ottawa time — the biggest jump in more than a month. Traders in overnight swaps upped bets for rate hikes, and are now pricing two hikes by the October meeting. The spread between Canada and U.S. short-term debt narrowed.

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It’s a lesson for central bankers laying out hypothetical responses to economic shocks. When those actions hinge on commodities that are priced in real time, that sort of policy guidance can trigger significant market moves.

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Bank of Canada policymakers were “balanced in their message, but the bond market only heard ‘consecutive increases,’” Ian Pollick, global head of fixed income, currency and commodities strategy at Canadian Imperial Bank of Commerce, wrote in a report to investors.

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In the bank’s monetary policy report, it cautioned that its economic projections were conditional on assumptions that oil prices would stick around US$90 per barrel for a while and gradually decline to US$75 per barrel by mid-2027.

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With assistance from Mario Baker Ramirez

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