All’s well that ends well: the title of a play by William Shakespeare and a summation of the Canadian bond market in May. Prices of bonds, particularly those with longer maturities, fell sharply early in the month. The price of 30-year Canada bonds, for example, dropped almost 6% in the first two weeks. In large part, the weakness in Canadian bonds reflected a plunge in global bond prices, with 30-year U.S. Treasuries falling 7½ % over the same period. The bond weakness appeared to be led by a continuation of the European bond market selloff that began in the previous month. In the second half of May, though, global bond prices recovered much of their losses as investors focused on weaker economic data and a potential default by Greece in early June. The recovery in Canadian bonds was also spurred by buying in anticipation on index duration extensions in early June. The FTSE TMX Canada Universe Bond index returned 0.20% in May.

Universe and Long Term Bond Returns in May

Following its May rate-setting meeting, the Bank of Canada expressed optimism that the Canadian economy was likely to begin improving. However, the economic data received during May was not positive and it implied that the Bank of Canada would not raise interest rates for the foreseeable future and might even choose to reduce rates later this year. Of particular note was that Canadian GDP was weaker than expected in the first quarter of this year, declining 0.6%. Very weak business investment spending, particularly in mining and oil & gas, was the main reason. In addition, Canada suffered a record trade deficit in the latest month (March) as energy exports declined and imports of consumer goods rose. The unemployment rate held steady at 6.8%, as the decline in the number of jobs was offset by a decline in the participation rate. Inflation in the most recent month declined to 0.8% from 1.2%, due to lower energy prices, although core CPI only declined to 2.3% from 2.4%.

In early May, the price of oil hit its highest level since December but, over the balance of the month, the oil price ratchetted lower. That short term downtrend gave the impression that oil had reversed course but, in fact, oil actually appreciated 1.1% in May.

Price of WTI Oil

The weakness in oil for much of May contributed to the Canadian dollar depreciating 3% versus the U.S. dollar in the month. The weaker Canadian economic data including the lower than expected inflation rate led investors to re-evaluate the possibility of another interest rate cut by the Bank of Canada this year, and that also contributed to the Loonie’s weakness.

1 2 3