The bond market was weak for most of February, eking out a small gain with a rally in the final days of the month. The trend to higher yields and lower bond prices that dominated January extended into the first half of February. However, disappointing economic data received during February led some market participants to conclude that the Bank of Canada would not follow the U.S. Federal Reserve in raising interest rates, instead leaving its extra monetary stimulus in place. As a consequence, the Canadian bond market reversed course, with bond prices rising and yields falling in late February. The FTSE TMX Canada Universe Bond index returned 0.15% in the month.

It was noteworthy that the Canadian and U.S. bond market mostly ignored the substantial stock market volatility that occurred at the beginning of February. For example, the U.S. S&P500 equity index fell over 10% from January 31st through midday February 9th, while the Canadian S&P/TSX dropped more than 7%. There was no flight to safety move in the bond markets, though, as U.S. yields actually moved higher while Canadian yields were little changed. In large part, the equity selloff was attributed to concerns about higher bond yields hurting corporate profitability as well as equity valuations. So, it made sense that government bonds ignored equity market fears about bonds. Corporate bonds did experience some mild widening of their yields spreads in reaction to the stock market gyrations.

Canadian economic growth appeared to slow, as the preponderance of data received in February was weaker than expected. Unemployment rose to 5.9% from 5.8% the previous month, as 88,000 jobs were lost across Canada. The losses were focused in part time positions, which fell by a record 137,000 in the month, and economists attributed only a portion of the weakness to the very large hike in the Ontario minimum wage. In addition to the poor jobs numbers, wholesale trade and manufacturing sales in January were below expectations and December retail sales were weaker than forecasts. As well, monthly inflation was higher than expected, which meant the annual rate did not fall as much as predicted.

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