The Canadian bond market, as measured by the FTSE TMX Canada Universe Bond index, gained 0.51% in April. Economic news in both Canada and the United States was generally good, and in most months that would have caused bond prices to decline and yields to rise. In April, however, investors focussed less on economic fundamentals and more on geopolitical developments. The ongoing turmoil in Ukraine resulted in a flight-to-safety bid for bonds that caused bond prices to rise and yields to fall modestly.

In Canada, the economic data was positive. The unemployment rate fell from 7.0% to 6.9% as job creation was robust. The Canadian economy grew satisfactorily in the most recent month and GDP was up 2.5% from a year earlier. Canada enjoyed a rare monthly surplus in trade as exports grew more rapidly than imports. In addition, manufacturing sales, wholesale trade and vehicle sales were all stronger than expected. The only negative surprise during April was housing starts which plummeted to a 156,800 unit pace from 190,700 a month earlier. It was not clear whether this was a statistical anomaly or the long-awaited start of a Canadian housing correction, and we will need to wait at least another month to determine this. The Bank of Canada left interest rates unchanged at its April meeting and reiterated that the direction of future rate changes was dependent on the pace of growth and inflation. However, the likelihood of rate cuts was subsequently reduced by slightly faster than expected monthly CPI inflation and the annual inflation rate rose to 1.5% from 1.1%.

Foreign investor interest in Canadian bonds continued to decline. The net purchases in the most recent 12 month period fell to the lowest level in 7 ½ years. In the current environment, Canada’s AAA-rated safe haven status is failing to attract international interest. Until investor sentiment improves regarding Canadian growth prospects, it is difficult to anticipate that demand for Canadian bonds will rebound significantly.Foreigners not buying Canadian Bonds

Economic data in the United States was somewhat more mixed than in Canada. Unemployment held steady at 6.7%, but private employment, which excludes government jobs, finally surpassed the pre-recession peak. The improving labour situation contributed to better consumer confidence, which in turn led to higher vehicle sales and stronger than expected retail sales. Industrial production, which includes manufacturing, mining, and utilities, also exceeded expectations. Less positively, the housing sector was weaker, with starts and sales of new homes lower than forecast and existing home sales flat. In addition, first quarter GDP was estimated to have grown at an annual rate of only 0.1%. However, many observers, including American central bankers, felt the slowdown was due primarily to the severe weather during the period. The Federal Reserve decided to continue tapering its bond purchases, cutting the monthly pace by $10 billion to $45 billion.

Internationally, growth concerns abounded. In Europe, economic growth remained low and the European Central bank was concerned about inflation being too low. As a result, there was speculation that the ECB might initiate its own quantitative easing programme as well as possibly lower interest rates further. Chinese economic activity also remained soft, raising concerns that the government’s 7.5% growth target would not be achieved. This prompted the introduction of additional, minor government stimulus. Overshadowing these economic concerns were escalating tensions between Russia and the West over unrest in Ukraine.

The Canadian yield curve flattened slightly in April. Yields of 2-year Canada bonds were unchanged, but those of longer term issues declined 3 to 5 basis points. The United States yield curve flattened more, as 30-year Treasury yields fell another 10 basis points in the month. So far in 2014, the long term bond yield has fallen over 50 basis points, even as the Fed has cut bond purchases and the economic recovery continued.Long Term Yields Still Falling

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