Canadian bond yields rose and prices fell in March. Investors reacted to more hawkish comments from the Bank of Canada, but were also influenced by falling U.S. bond prices, as more favourable economic data in that country led to higher yields. The successful Greek debt swap also put pressure on bond values, as investors were less concerned about a possible European credit crisis. The selloff in the first half of the month took yields and prices outside of the trading range that had been established since late 2011, but the market recovered somewhat in the second half of the month. The DEX Universe Bond index declined 0.32% in March.

Economic data in Canada was mixed during the month. Canadian GDP growth slowed to an annual rate of 1.8% in the fourth quarter of 2011, but the estimate for the third quarter was revised up to 4.2% from 3.5%. Unemployment fell to 7.4% from 7.6%, although the number of jobs declined marginally. The difference was accounted for by fewer people participating in the labour force. Canadian retail sales rose 0.5% but, outside of auto purchases, consumers actually reduced their spending. High consumer debt levels and weak job growth appear to have discouraged buying activity. Consumer prices rose 0.4% for the second straight month, leaving the year over year rate at 2.6%. New housing starts remained strong at 201,000. The federal budget came and went with little market impact.

The Bank of Canada, as expected, left interest rates unchanged at its meeting in March. However, in its accompanying statement, the Bank acknowledged that the economy had improved since its previous meeting in January. It also noted that inflation was higher than it had expected due to higher energy prices and reduced economic slack. On balance, the Bank’s statement was slightly more hawkish than expected and that led to some selling of bonds by investors.

In the United States, the labour market continued to recover. While the unemployment rate failed to improve from 8.3%, job creation was robust, underemployment fell, the number of job openings rose to its highest level since mid-2008, and new claims for unemployment benefits fell to 4-year lows. As a result, consumer confidence remained positive, leading to solid consumption growth. Auto sales, in particular, rose sharply. To date, new vehicle sales have recovered roughly 80% of the decline experienced in the recession. The rebound in auto production has provided a major boost to the cyclical manufacturing sector. However, the other  major cyclical sector in the U.S. economy, housing, has only recovered marginally from the depths of the recession. It was encouraging, therefore, to learn in March that starts of new homes remained in a modest uptrend, and that home prices appeared to be stabilizing after their long drop. On balance, the positive economic news received in the month led investors to sell bonds and buy stocks. Indeed, the selloff in the U.S. bond market in the first half of the month was sharp enough that Fed Chairman Ben Bernanke was obliged to remind markets that the Fed was likely to keep rates extraordinarily low until 2014 to ensure the recovery didn’t falter. As a result, bond prices recovered a portion of their earlier declines.

US Light Vehicle Sales

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