Global bond prices moved lower, as resurgent economic growth and the potential for reductions in monetary stimulus caused investors to become more defensive. Canadian bonds were no exception; their yields moved higher, participating in, but not leading, the trend. Yields of 10-year Canada Bonds, for example, rose 25 basis points in the month, but the yields of similar term issues in the United States, Germany, and the United Kingdom all rose by larger increments. The FTSE TMX Canada Universe Bond index declined -0.80% in the month.

Canadian economic news in January was generally positive. Unemployment fell to 5.7%, the lowest level in over 40 years, as job creation was very strong for the second consecutive month. Monthly growth in Canadian GDP was quite good, leaving the 12-month pace at a vigorous +3.5% pace. Housing starts slowed but remained robust. Inflation edged lower to 1.9% but was not expected to decline further. Considering the better than expected economic performance since its last assessment in October, the Bank of Canada decided to raise its benchmark overnight rate to 1.25%, the highest level in nine years. In doing so, the Bank brought its rate back to even with the U.S. equivalent, following the December increase by the Federal Reserve.

U.S. economic data continued to indicate that that economy was operating at full capacity. The unemployment rate held steady at 4.1%, the lowest in 17 years. While the initial estimate of fourth quarter GDP growth disappointed slightly at 2.6%, optimism about the economy abounded as reflected in surging equity prices. At the Fed’s January 31st meeting, Janet Yellen’s last as Chair, the U.S. central bank left rates unchanged. It had been widely expected to wait until its next meeting in March to raise rates again.

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