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The Canadian bond market enjoyed strong gains in May, as developments south of the border drove yields lower and prices higher. Canadian bond yields have taken their lead from the U.S. bond market throughout 2014, and last month was no different. In the U.S., however, many investors struggled to reconcile the bullish behaviour of U.S. Treasuries with record levels on stock markets, improving second quarter economic data, and reduced bond purchases by the Federal Reserve. The consensus explanation for the bond rally appears to reflect concerns about global growth prospects, continuing low inflation, and low probability of central bank monetary tightening. Asset mix shifts from equities to bonds by pension funds and short-covering by speculators have also contributed to the rally this year. Speculation that the European Central Bank would initiate a quantitative easing programme of bond purchases also spurred some bond purchases during May. The FTSE TMX Canada Universe Bond index returned 1.22% in the month.
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