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The Canadian bond market gained 0.84% in November, as the European debt crisis once again dominated economic news as the main driver of bond price movements. Canadian bonds also benefitted from month-end buying as investors sought to reinvest early-December coupon payments, as well as rebalance their portfolios in anticipation of index duration extensions.
The European debt crisis continued unabated, with investors demanding substantially higher yields especially on Italian and Spanish bonds in order to roll over those countries’ debt. Other Eurozone countries, including France, also experienced rising yields as investors worried about potential defaults. The crisis in Italy was particularly acute, as its Prime Minister Silvio Berlusconi was forced to resign and a group of technocrats was appointed to rectify the Italian deficit and establish plans to reduce its total borrowing. In contrast with Greece, Italy’s financial situation is stronger as it has a primary surplus, meaning that, prior to interest payments, the government spends less than it takes in through taxes. As well, a high proportion of Italian debt is held domestically, so it is not over-reliant on foreign investors. However, total Italian debt is considered high relative to the size of its economy, and also high relative to the ability of the rest of Europe to bail it out. As a result, the focus on Italy added a new degree of urgency to the crisis.
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