Canadian government bond yields will edge higher into 2012, but at a slower pace than previously thought, as fears about global growth will likely delay interest rate increases by the Bank of Canada, according to a Reuters poll.
Economists and fixed income strategists slashed their money market and bond yield forecasts from July's forecast in the monthly Reuters poll this week. The shift followed a trend among other major government bonds and reflected recent market turmoil, including fears about European debt levels.
"Weak growth in the US will keep fears about global growth alive and well," said Benjamin Reitzes, an economist at BMO Capital Markets. "On top of that, you get continued flight to safety bid because of the trouble in Europe." Bonds prices tend to benefit from flight to safety bids as investors park their cash in low-risk government debt, pressuring yields lower.
The poll of 13 fixed income analysts put the median forecast for the two-year Canadian government bond yield at 1.20 percent by the end of November and 1.5 percent by the end of February, before it advances to 2.22 percent by the end of August 2012. This was down from a median forecast of 1.76 percent, 2.1 percent and 2.79 percent, respectively, in July's poll.
The two-year yield is currently about 1.01 percent. Short-dated bonds are the most sensitive to interest rate expectations.
"Right now, yields are just at unsustainably low levels," said Jimmy Jean, economic strategist at Desjardins Capital Markets. "Once the economic situation kind of stabilises there's going to be some moderate return of risk appetite so we could see some gradual increase in yields." But yields would be pressured, he said, until it becomes clearer that central banks are ready to begin raising rates.
Federal Reserve Chairman Ben Bernanke pledged to hold US interest rates near zero until 2013, fuelling expectations the Bank of Canada will maintain its overnight rate at its current 1 percent level for longer than previously anticipated. Tighter policy is seen driving bond yields higher. While Canadian primary dealers still expect a hike, not a cut, to be the most likely course of action from the Bank of Canada, they have broadly scaled back their targets for the next rate increase into 2012, or even later, according to a Reuters poll.
This week's poll found the 10-year bond yield, currently at 2.43 percent, is expected to rise to 2.80 percent by the end of November. That is down sharply from the July poll when analysts thought the 10-year bond yield would rise to 3.40 percent in three-months' time. Now it is seen advancing to 3.43 percent but not until the end of August next year.
Three-month T-bill yields, now at 0.9 percent, will rise to 0.95 percent by the end of the third quarter, and steadily advance to 1.58 percent by early next year. That compares with July's view of 1.20-1.95 percent in roughly the same time horizon.