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The bond market experienced a seesaw month, with prices initially falling and yields rising to multi-year highs. However, fears of a renewed Eurozone crisis and a trade war with the United States prompted a sharp reversal during the second half of the month. Having been down close to 1.00% at mid-month, the Canadian bond market finished strongly, erasing both the early May losses, as well as those experienced in April. The FTSE TMX Canada Universe Bond index returned 0.80% in May.
Canadian economic data received in the month was generally positive and contributed to the rise in bond yields in the first half of the month. The unemployment rate held steady at 5.8%, the lowest level since at least 1976. GDP growth in the first quarter of 2018 was weaker than expected, but the details suggested the economy would accelerate in the second quarter and year over year growth was still very good at 2.9%. Monthly retail and manufacturing sales were better than forecast, and housing starts remained strong. Inflation eased slightly to 2.2% from 2.3% a month earlier but remained above the 2.0% target pace. At its May 30th rate-setting announcement, the Bank of Canada left its interest rates unchanged, but the accompanying statement hinted that increases would occur on its July 11th announcement date. Expectations of rate increases resulted in shorter term bond yields holding steady, rather than declining with longer term yields.
In the United States, the data continued to show the economy operating at full capacity. Examples included unemployment dropping to 3.9% from 4.1%, stronger than expected industrial production and factory orders, and inflation rising to 2.5% from 2.4% a month earlier. The Federal Reserve left its benchmark interest rates unchanged but was widely expected to increase rates at its next meeting on June 13th. Notwithstanding the good economic news, U.S. bond yields moved lower in the month as a flight-to-quality bid developed and tape bombs from the White House threatened the start of a global trade war that would reduce future economic growth.