Hike rates

Bank of Canada unlikely to hike rates through March, despite surging yields: BMO

Canadian bond yields are skyrocketing, but the central bank should not raise rates. At least not yet, according to an analysis by BMO Capital Markets. Government of Canada (GC) bond yields hit a multi-year high for annual growth in 2021. This means growing market expectations for the near-term overnight rate hike. Despite the surge in rates, BMO does not expect the Bank of Canada (BoC) to raise rates in January. Public health measures make this unlikely, but they still see an early rise.

Canadian bond yields rise at record pace over several years

The 5-year Government of Canada bond soared to one of the fastest rates on record last year. The yield ended 2021 at 1.264%, up 86.5 basis points (bps) from the previous year. This was the biggest increase since 2009 and led to higher Government of Canada bond yields. Yields influence the cost of debt with similar durations. In this case, the most notable is the 5 year fixed rate mortgage.

Long-term Government of Canada bond yields also posted a multi-year record. The 10-year ended 2021 at 1.426%, up 75 basis points from the previous year. This is the largest increase since 2013, according to BMO analysis.

Bank of Canada will always increase overnight rate ahead of schedule

BMO does not expect a rise this month despite rising yields across the curve. “With pandemic restrictions reimposed across Canada, it’s hard to believe the BoC will be ready to raise rates as early as January,” said Benjamin Reitzes, the bank’s Canadian rate strategist. Adding: “… the first realistic chance of a hike is more like March, which could provide some support for short-term bonds to start the year.”

The most recent central bank update said April would be the first they were ready to increase. A hike in March is still technically early according to their schedule. Yet they brutally killed their quantitative easing (QE) program a few months earlier. This has left some strategists wondering if interest rates will rise much sooner, but that’s a bit of a stretch. On the positive side, extending low interest rates will make borrowing very cheap and attempt to deal with high inflation.