Market Insights: Canadian Bond Yields Heading Lower

Milestone Wealth Management Ltd. - Dec 17, 2021

Macroeconomic and Market Developments:

  • North American markets were lower this week, giving back some of last week’s gains. In Canada, the S&P/TSX Composite Index was down 0.71%. In the U.S., the Dow Jones Industrial Average was down 1.68% and the S&P 500 Index was down 1.94%.
  • The Canadian dollar was lower this week, closing at 77.56 cents vs 78.60 cents last Friday.
  • Oil prices were mixed this week, with WTI down and WCS in the positive. U.S. West Texas crude closed at $70.45 vs $72.00 and the Western Canadian Select price closed at $55.70 vs $54.49 last Friday.
  • The gold price was positive this week, closing at $1,798 vs $1,782 last Friday.
  • The big driver in the markets this week was the U.S. Federal Reserve. On Wednesday, chairperson Jerome Powell announced that the central bank would accelerate the taper of its Quantitative Easing program, decreasing the program by US$30 billion/month instead of US$15 billion. This news would see the QE program end by March 2022 and sets up the possibility of three interest rate hikes by the end of 2022. The markets quickly rallied on this news, reversing a negative trend for the first part of the week. This rally continued until Thursday morning before selling took hold again and continued until Friday’s close.
  • Suncor Energy (SU) released its 2022 corporate guidance this week, supporting previous announcements that it plans to double its dividend, increase share buybacks and lower its capital program by $300 million. Highlights of the announcement include total Suncor upstream production of 750-790 Mboe/d vs estimates of 744.1 Mboe/d and a capital program of C$4.7 billion vs estimates of C$4.79 billion.
  • Cenovus Energy (CVE) announced another transaction this week. The company has reached an agreement to sell its Tucker thermal asset for total cash proceeds of $800 million. Proceeds from this transaction will be used to further accelerate the company's reduction of net debt and enhance its capacity to increase shareholder returns.
  • Pfizer (PFE) said on Monday it would buy drug developer Arena Pharmaceuticals (ARNA) for US$6.7 billion in cash. This acquisition will add a promising treatment candidate that targets diseases affecting the stomach and intestine. Arena is developing several treatments for gastroenterology, dermatology and cardiology.
  • Apple (AAPL) has been on an upswing lately. Not only has the company retaken the top spot as the world’s largest publicly traded company from Microsoft (MSFT), but Apple now looks to be the first company in history to hit the $3 trillion valuation mark. As of the end of this week, Apple’s total market capitalization stands at US$2.81 trillion.
  • Cineplex (CGX) announced that it received a decision from the Ontario Superior Court of Justice awarding the theatre company damages for breach of contract in the amount of C$1.24 billion. Cineplex had filed a case against UK-based Cineworld Group (CINE) after Cineworld decided not to proceed with a takeover of Cineplex that had been agreed to prior to COVID. It is uncertain how the payment could be made given that the entire market capitalization of Cineworld is less than the awarded amount.
  • Canadian inflation data was released this week, with the Consumer Price Index coming in at 4.7% last month, with the monthly gain for November at 0.2%. Both of these numbers were in line with estimates. The core CPI rate, which excludes volatile sectors, was up a more modest 2.73%.
  • In the U.S., another measure of inflation called the Producer Price Index (PPI) rose 0.8% in November, well above the expected 0.5%, and are up 9.6% compared with a year ago. Core producer prices, excluding the more volatile food and energy segments, increased 0.7% in November and are up 7.7% in the past year.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Signs of Excessive Internal Weakness: DWYER VLOG

Weekly Diversion:

Check out this video of 15 Emerging Technologies that Will Change the World.

Chart of the Week:

The Canadian Consumer Price Index (CPI) for November was released this week, revealing an increase of 4.7% from November 2020, with the ‘core’ CPI (which excludes more volatile sectors like gasoline) came in at 2.73%. Whereas these inflation statistics are much lower than data presented from the U.S., these are clearly very high inflation numbers.

To combat inflation, the Bank of Canada announced in October that it is ending its Quantitative Easing program entirely, well ahead of the U.S. central bank. The Bank of Canada hasn’t revealed when it will begin raising interest rates, but the prediction is that it will be some time in early 2022.

Combining higher inflation with the Bank of Canada in tightening mode, one would think that the interest rate on Canadian government bonds would be on the rise. However, recently the rate on the benchmark 10-year government bond has been plummeting, dropping from roughly 1.75% to roughly 1.30% in just a matter of weeks. In fact, as this chart illustrates, the yield on the 10-year bond has been fairly flat since March 2021 despite the economy recovering, QE being discontinued, and inflation spiking.

Evidently, this contradiction demonstrates that the bond market is not consistent with the central bank in terms of predicting high inflation in the future. If bond market participants believed that inflation would continue unabated into the future, the 10-year yield would be much higher to reflect this theory. What may have triggered such a massive drop in interest rates in the last few weeks? The most likely answer is Omicron: the uncertainty surrounding this new variant and its effect on the global economy. Stock markets have been volatile since Omicron was discovered. This perceived threat may have investors selling stocks to purchase the relative safety of government bonds (when the price of a bond goes up, its yield conversely goes down). Therefore, until the stock market finds some sense of calm again, a clear picture of where the 10-year government bond yield will settle out remains undetermined.


Sources:, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Market Watch